Monthly Archives: August 2020

The Case of Thai Joint Venture With Japanese Partner in Construction Business

Literature Review

Business in the 21st century is increasingly conducted with shifting borders. International partnerships will become standard practice as the product life cycles shorten and immediate distribution become imperative. As business is increasing its globalization, alliances among multinational firms are becoming more popular. Cooperation between international firms can take many forms such as, cross-licensing of proprietary technology, sharing of production facilities, co-funding of research projects, and marketing of each other’s products using existing distribution networks (Griffin and Pustay, 2005). Such forms of cooperation are known as strategic alliances, business arrangements whereby two or more firms choose to cooperate for their mutual benefit. A joint venture is a specific and more formal type of strategic alliance.

2.1 Defining International Joint Venture (IJV)

An international joint venture (IJV) is a special type of strategic alliance in which two or more companies from different countries join together to create a new business entity that is legally separate and distinct from its parents. Joint ventures are normally established as corporations and are owned by the founding parents in whatever proportions they negotiate. Although unequal ownership is common, many are owned equally by the founding firms (Berger, 1999).

Here is also a definition adapted from Shenkar and Zeira (1987):

1 it is a separate legal organisational entity, and belongs entirely to neither/none of its parent;

2 it is jointly controlled by its parent;

3 these parents are legally independent of each other;

4 the headquarters of at least one parent is located outside the country in which the IJV operates.

As stated some IJVs are formed on an equity basis, more flexible arrangements may depend on contract cooperation without involving the legal commitments of equity. Some IJVs may have more than two parents. In general, the more parents the greater the administrative complexities and the greater the problem of managing the project. Sometimes, both (or all) parents are located outside the IJV country. For example, Coca Cola (Vietnam) was started as an IJV between Coca Cola (USA) and a Singaporean bottler; originally it did not employ any Vietnamese managers, as a result the company needed to deal with cultural difference (Beamish, 1985).

In terms of the construction industry, joint venture has been seen as a tool for improving the performance of the construction process and emphasizes the way it helps to create synergy and maximize the effectiveness of each participant’s resources (Barlow et al., 1997).

The Construction Industry Institute defines joint ventures as a long-term commitment between two or more organisations for the purpose of achieving specific business objectives by maximizing the effectiveness of each participant’s resources. This requires changing traditional relationships to a shared culture without regard to organisational boundaries. The relationship is based upon trust, dedication to common goals, and an understanding of each other’s individual expectations and values (Barlow et al. 1997). To date, joint venture is understood as a set of collaborative processes, which emphasizes the importance of common goals. The base of joint venture is a high level of interorganisational trust and the presence of mutually beneficial goals. Joint venture means a management process that helps the strategic planning to improve the efficiency of the enterprises, and forms a team with common objectives (Barlow et al. 1997). Participants of a project can improve performance in terms of cost, time, quality, build ability, fitness-to-purpose, and a whole of range of other criteria, if they adopt more collaborative ways of working (Bresnen and Marshall 2000). Barlow et al. (1997) mentions six successful factors of joint venture: building trust, teambuilding, the need for top level commitment, the importance of individuals, the strategic movement of key personnel, and the need for open and flexible communications. The same authors quote as common benefits in a joint venture relation: reduced costs, shortened delivery time, improvement in construction quality, better working atmosphere, and organisational learning. Joint venture classifications focus on the duration of cooperation between partners. This dissertation will be used as a case study to explore the extent and native of these benefits in practice.

Two main types of joint venture are found in literature: project joint venture and strategic joint venture or long-term joint venture. Project joint venture is a cooperative relationship between organisations for the duration of a specific project (Barlow et al. 1997). At the end of the project, the relationship is terminated and another joint venture may commence on the next project (Kumaraswamy and Matthews 2000). Welling and Kamann (2001) state that if these firms do not meet again in another project, the learning effect reached on the particular project will be eliminated. Strategic joint venture is a relationship with a high level of cooperation between partners (Barlow et al. 1997), which takes place when two or more firms use joint venture on a long term basis to undertake more than one construction project, or some continuing activity (Kumaraswamy and Matthews 2000). In this kind of joint venture, the learning achieved in a specific project is more likely to be used in future projects. In the context of a strategic joint venture, it becomes a management philosophy that is expected to work continuously for each and every project and there are more expectations from team members than for a project joint venture (Cheng and Li 2001). The type of TNC JV is the strategic joint venture where Thai and Japanese Partner are focusing on the long term goal.

2.2 Seeing Joint Ventures as a Foreign Market Entry and Development Strategy

Joint ventures are sometimes viewed as a second (or even third) best option for supplying a foreign market-being used only when government regulations (e.g. ownership and export controls, restrictions on royalty payments, etc.) prevent the establishment of wholly owned subsidiaries, exports, or licensing. Indeed, there are major problems that arise in the planning, negotiation, and management of international joint ventures. Despite such difficulties, it is widely recognised in the literature that there are important strategic and competitive advantages that may be derived from successful joint venture agreements, and such collaboration may be a first option in certain circumstances (Kenichi Ohmae, 1985). Connolly (1984), for example, argued that the assets of developed-country multinational enterprises (capital, foreign exchange, technology, management, and marketing skills, etc.) and developing-country firms (lower costs, greater familiarity with local markets, etc.) are complementary, and that the combination of these assets in a joint venture results in mutual benefits. This can be seen in the case of TNC. Similarly, Contractor (1984) argued that the loss of control and the sharing of profits inherent in equity joint ventures is more than compensated for by the expertise and capital contribution of the local partner; contacts with government officials; faster entry into the market; and risk reduction. Harrigan (1984, 1985) argued that joint ventures should not be seen as a hiding place or a sign of weakness. Rather, if organized properly, joint ventures would be a source of competitive advantage, a means of defending existing strategic positions against forces too strong for one firm to withstand itself or as a means of implementing changes in strategic postures (e.g. diversification access to technology). Joint ventures allow each partner to concentrate their resources in areas of expertise, while enabling diversification into attractive but unfamiliar business areas. Overall, Harrigan (1984, 1985) concludes that joint ventures are important strategic weapon in responding to the challenges of global competition.

2.3 Reasons for forming the IJV

The partners (Thai and Japanese) may have shared interests in forming an IJV which give both opportunities to

5 create greater market power by combining resources;(Bell, 1996)

6 reduce risk by sharing costs (costs of investment and production are shared);

7 reap economies of scale;

8 cooperate and avoid competition , which might incur greater costs than those incurred by agreeing to the IJV (the IJV is an alliance that restricts your own capacity for independent action, but also restricts that of your partner); (Contractor & Lorange, 1988).

In general, though, most IJVs offer parents different opportunities which arise from their different environments. A project might offer the foreign parent access to a local market, and the local parent access to the international market. According to (, in 1997 two securities companies, the Premier Group of Thailand and SBC Warburg, formed a joint venture designed to provide Warburg with local expertise and Premier with international access.

Furthermore, the foreign parent needs to meet the host government’s requirements for doing business in the country (in this case the Thai Government). For instance, a foreign company is only permitted to operate in the country if ownership is shared with a local company. The IJV offers the foreign parent opportunities to learn about local marketing conditions and to gain access to local resources, including production facilities, labour, and materials. For the local parent these are opportunities to generate upstream and downstream industries. For instance, the development of an IJV pulp mill encourages local entrepreneurs to increase logging facilities and to invest in paper manufacture. The local government benefits by opportunities to encourage foreign investment. Also, the foreign parent may be allowed to take only minority ownership, and must fulfil conditions regarding local employment, technology transfer, purchase of local materials, etc (Chowdhury, 1992).

2.4 Factors influencing IJV success and failure

The more that the company depends upon the strategic alliance in order to achieve its strategic goal, the more it invests in the success of the alliance. In the case of TNCJV this means investing to find the ideal partner. Finding the ideal partner takes time and effort, and the greater the importance that the firm gives to this selection process, the greater the chances of success (Geringer 1991).

Hung’s (1992) study of Canadian companies operating in South-East Asia found that “the most often mentioned difficulty is to get the right partner company, one which has compatible objectives and is trustworthy”. Therefore, trust is one of the most important parts of forming the IJV. Trust factors then will be reviewed:

2.4.1 Trust between the parents

The project is more likely to succeed when each parent trusts that the other is genuinely committed to the project and will do its best to abide by all agreements between them (Demirbag & Mirza, 2000).

When more partners trust each other, the easier they find it to reach agreement on internal arrangements:

1 applying the same strategic priorities to planning;

2 management style, and systems;

3 systems for communicating between the parents, the IJV, and parents; within the IJV; and with the environment

4 factors associated with business interests, goals, impact of size, timescale

5 assessments of IJV success and failure: project evaluation, both ongoing and upon termination.

(Demirbag & Mirza, 2000)

2.4.2 Mistrust between parents, and the environment

Mistrust arises from

13 inadequate planning;

14 communication problems between parents (Thai and Japanese in this case)

15 wide differences in the national and organisational cultures of the parents;

16 one parent changing its attitude to the project in response to its own internal changes – e.g., a new strategy, a new CEO;

17 one parent changing its attitude to the project in response to changes in its business environment.

To take the final point: both parents operate in their own volatile business environment. Their local markets and competition differ. They are subject to different local political, social, and economic pressures. These environmental differences make any alliance inherently unstable (Geringer, 1988).

According to Mikio Kunisawa Representative Director of Nishimatsu Construction (HQ in Japan), TNC had a full order book including a heavy work load and the prospect of many new projects during year 2005-2006 period. However, the situation at year-end is somewhat different from his expectation, particularly for Nishimatsu’s Bangkok Office, and TNC now faces a challenge to maintain the business levels of the previous years (2006). The primary factor affecting business confidence is the continuing general political instability in Thailand, including an inconclusive general election and the resulting postponement of government decisions regarding infrastructure and development projects ( In the light of this uncertain situation, the forecast indicator for economic growth in Thailand has been revised downward. A further effect has been a downturn in business confidence within the private sector, reducing planned investments in the industrial and real estate sectors ( This situation could then establish uncertainty between the parent company and the environment they face.

These factors of environmental uncertainty might be the reason for focusing only on short-term alliances with highly specific goals. The partners might use an initial limited alliance in order to test the possibilities for a greater commitment and to build trust (Harrigan, 1985). This also has implications for communication. Each partner needs to communicate information about its own environment and to develop knowledge of the other’s.

2.4.3 Trust within the project

A project succeeds when project staff trusts each other and when persons posted from the two parents develop a synergetic relationship. Before project operations start, a shared project culture is fostered by mixing staff from the parents in groups, where they work together on project planning. They exchange non-critical technological and business data (Harrigan, 1985).

A lack of trust arises when

18 staff join the project ignorant of the needs and interests of their colleagues from the other parent;

19 local staff feel threatened by a stronger foreign parent;

20 conflict arise from human resource and technology transfer policies (one parent cannot supply the skills to which it is committed);

21 cultural differences are exploited.

2.4.4 Trust between the project staff and their parent

A project succeeds when staff posted to it feels confident of the support of their headquarters. Mistrust arises when promised support fails to materialize, or staff feel that their long-term career prospects with the company are in jeopardy. A project is also undermined when top management fails to communicate its goal effectively within the organisation. Subordinate levels perceive it as a drain on their resources, and give it a minimum of attention (Kachara & Hebert, 1999).

2.4.5 Similar business interests

The potential partners are more likely to work together effectively when they have related interests. The parents of successful IJVs have similar interests and belong to similar or complementary sectors. When both contribute and learn from the other, fruitful cooperation is possible. Companies in the same industry form alliances when they hope to benefit from discrepancies in technology, systems, and markets (Kogut, 1988). By 1993, joint ventures parented by the Swiss food firm, Nestle, included alliances with Coca Cola (canned coffee and tea drinks), General mills (cereals), and two companies in the people’s Republic of China (a coffee and creamer plant, an infant formula and milk powder plant).

2.4.6 Compatibility in size

Incompatibility in the size of the parents is important when one uses its greater resources to dominate the project in its own interests alone. However, the development of business by Internet and other electronic media means the business can expand (and contract) in a very short time, and the size of staffing complements and physical resources is no longer an accurate guide to a firm’s financial and knowledge power (Kachra & Hebert, 1999).

The research of a foreign direct investment in Japan discovered that the attitude taken by the Japanese bureaucracy was influenced by such factors as the investor’s care for its relationship with the government, the profitability of the IJV, the foreign parent’s commitment, timing and location, and technology transfer issues. However, “the size of the investor does not seem to matter much” (Thawley, 1996).

2.4.7 Compatibility in timescale

The parents need to share a timescale. Suppose that Parents A and B are both prepared to invest in five years’ development costs. The project is set fair. But contradictions arise when Parent A aims at reinvesting profits made during the initial period whereas Parent B wants a quick return from its investments (Li, 1995).

2.5 Culture influencing IJV success and failure

2.5.1 Cultural dimensions by Hofstede

Cultural distance between partners and its impact on IJV performance has so far been the most commonly reviewed variable. The distance has usually been expressed multi-dimensionally (based on Hofstedé (1980) four cultural dimensions and an index developed by Kogut and Singh (1988)). Cultural similarity decreases problems caused by cultural issues (e.g. different norms of behaviour and productivity, measurement and goals related to performance) and should facilitate trust and cooperation between partners. Barkema and Vermeulen (1997) tried to analyse in more detail the impact of culture on IJV performance. Using the five different cultural dimensions by Hofstede – power distance, uncertainty avoidance, individualism, masculinity, and long term orientation – the authors expected that there would be differences in the impact of various dimensions. Differences in uncertainty avoidance are difficult to cope with because they imply differences in how people perceive opportunities and threats in their environment and how they act upon them (Schneider & Meyer, 1991). In high uncertainty avoidance countries organisations tend to respond to uncertainty by building up a system of high formalization and hierarchy. In low uncertainty avoidance countries people are more attracted to flexible, ad hoc structures that leave more room for improvisation and negotiation. Differences in uncertainty avoidance lead to differences in how partners perceive and respond to events in the environment of the IJV, which will likely breed disagreement and disputes between the partners, and have a detrimental impact on the IJVs performance. Power distance and individualism directly bear on issues of internal integration and influence relationships with personnel, such as the choice of control forms, reward systems. Management of personnel is usually one of the first activities to be left to the local partner. There is also evidence that MNCs do not transfer cultural values related to power distance and individualism to their foreign subsidiaries (Soeters & Schreuder, 1988). Thus tensions between the partners with differences along these dimensions may be avoided. Shenkar and Zeira (1992) suggest that having partners from both “feminine” and “masculine” cultures may even benefit the IJV. The aggressive attitude of one partner and the relationship orientation of the other may complement each other rather than collide. The above discussion suggests that differences in uncertainty avoidance would be more important than the other three dimensions. The empirical results by Barkema and Vermeulen (1997) supported the expectations: uncertainty avoidance and long-term orientation had greater differential negative impact on IJV survival than masculinity, while the two other dimensions (individualism and power distance) had no impact. What concerns the Asian context it can be said that all potential Asian cultures have rather similar cultural profile. This profile includes rather few layers of decision-making, more risk taking, greater group emphasis, and higher concern for relationships (Swierczek & Hirsch, 1994). This can be applied to TNC where Thai and Japanese culture share some similarities.

One culture can influence how willing one is to trust a possible joint venture partner. In terms of culture, the Japanese tend to be somewhat introverted in their ways. They generally are not receptive to outsiders. When conducting business with Japanese, it is important to note that relationships and loyalty to the group is critical for success.


According to Hofsted Cultural Dimension Scores, the score of Japan is dramatically different from other Asian Countries. Masculinity in Japan is the highest characteristic. The lowest ranking factor is Individualism, which coincides with their high ranking in Uncertainty Avoidance. Japan is a more collectivist culture that avoids risks and shows little value for personal freedom.


In contrast, Thailand’s lowest Dimension is Individualism (IDV). A low score, as Thailand has, indicates the society is Collectivist as compared to Individualist which this score is even lower than Japanese. It can be said that this is manifest in a close long-term commitment to the member ‘group’, is that a family, extended family, or extended relationships. Furthermore, the main different category compared to Japanese Dimension is Masculinity which ranks the lowest among the Asian Countries. This lower level is indicative of a society with less assertiveness and competitiveness, as compared to one where these values are considered more important and significant. This situation also reinforces more traditional male and female roles within the population.

2.5.2 Compatibility between national cultures

Ones culture also influences ones perception of the environmental factors discussed above; whether your business interests are similar (or in conflict), whether your goals are complementary, whether differences in size are important, what timescale should apply. In theory, partners are more likely to agree on these points when cultures are compatible. That is, joint ventures formed by parents of similar cultures stands a greater chance of succeeding than those based on between dissimilar cultures (Wille, 1988).

2.5.3 Different organisational cultures

If the organisational cultures of the two parents vary widely, a successful alliance might not be possible. However, this is not always the case. In the situation of TNC, the organisational culture of parent can be advantagous because the understanding of National Culture also affects the performance.

When talks designed to lead to strategic alliance between Mitsubishi of Japan and Daimler-Benz of Germany broke down, the following report was made:

“Analysts say the match has been strained from the beginning because the companies have fundamentally different structures. Daimler-Benz, a much smaller company than Mitsubishi, has traditionally had a close knit management structure that has tended to set out clear strategic goals and forge ahead. Mitsubishi, an amorphous conglomerate of several large companies, has moved much more cautiously with internal factions often disagreeing over broader policy.” (Yamawaki, 1995).

The companies were unable to overcome differences in their strategies, structures, and organisational cultures.

Staff posted to the project from the two parents is more likely to work well together when their organisational cultures are similar. This does not mean that they should be identical – an impossible condition. Rather, there must be a sense of comfort about how the other does the business, a willingness to work together and learn, and needs for shared solutions (Fedor & Werther, 1997).

2.5.4 How the IJV affects the parent organisational cultures

Parenting an IJV project can influence the culture of the parent headquarters by creating new spirit of “internationalism.” This is ADVANTAGOUS when headquarters staff benefit from an influx of new ideas and technologies, and develop new knowledge of the opportunities offered I the environment.

It is DISADVANTAGOUS when the outflow of staff to the IJV (and inflow of replacements) impairs internal cohesion. A positive culture is weakened when staff feels pressured by responsibilities for which they have no training and experience. Supporters of the project are isolated. Planning and operating the IJV influences the organisational culture of the parent headquarters. In order to respond to problems and opportunities arising from parenting the project, headquarters streamlines and reorganizes its structures (Siddall et al., 1992).

2.6 Motivational Perspectives between Thai and Japanese

One’s motives are major determinants of one’s behaviour. If the company can understand the employee’s motives, they can influence their employee’s behaviour. To motivate others is one of the most important management tasks. It comprises the abilities to understand what drives people, to communicate, to involve, to challenge, to encourage, to set an example, to develop and coach, to obtain feedback, and to provide a just reward. According to (Find Ref), “Motivation is about cultivating your human capital. The challenge lies not it the work itself, but in you, the person who creates and manages the work environment.” However, to motivate people in different culture might be difficult if the level of motivation is not the same. Ref describes how different culture might be perceived differently. Scandinavian cultures (Sweden, Norway, Finland, and Denmark) place a high value on quality of life and social needs. European and Anglo-American cultures place a high value on productivity, efficiency, and individual self-actualisation. Chinese culture values collectivism and community activity higher than individualism (Same Ref).

According to Maslow’s hierarchy of needs, he theorised that people have successive layers of needs, and that as each lower layer is satisfied, then the person moves on to the next layer up. The following diagram will explain how the model works:

(Maslow’s hierarchy of needs model from Maslow, 1943)

The lowest layer is that of physiological needs. It is the need to eat, sleep, stay warm, use the bathroom, etc. The second layer is safety (the need to have physical and psychological security, such as wanting the presence of law and keeping a job). The third layer is that of love and belonging (being the need to be part of a family, group, or gang). Some would say that this third layer is very much a Japanese domain, where belonging to a group seems to take priority over the achievement of higher layers. According to (Japanese Ref), he raises the question that “How many times have you seen very capable people like Japanese deny themselves a fuller career due to their desire to stay with some smaller company on the basis that it is their ‘family?'” The Japanese always put the top priority to their company. The fourth layer is that of self esteem and status. This is where high-achievers dwell, and are able to distinguish themselves commercially and professionally. The fifth layer is “Actualization.” According to, it gives the following description (extract): “Self actualized people embrace the facts and realities of the world rather than denying or avoiding them. They are spontaneous in their ideas and actions. They are creative. They are interested in solving problems, which often includes the problems of others.”

The interesting point to make here is whether Thai and Japanese have the same level in Maslow’s hierarchy of needs. At TNC, different level of needs might bring the conflict in interactive situations, for example, between Japanese employer and Thai employee, the model may need to be adopted in its applications among differing cultures. Even though the culture of Thailand and Japan might be similar, it does not mean that they would have the same desire or expectation.

Based on the literature review, the definition of IJV, and reasons for forming the JV have been illustrated. Factors including cultural differences between Thai and Japanese, and different motivational perspectives were explained. However, it is essential and vital to discover how these factors affect TNC employees based on their perception. In Chapter 4, findings and analysis from the interview will be examined.

Economic Relations Between the Western Balkan Six Countries

Regional cooperation between the western Balkan countries is the key factor that will lead those countries towards the EU perspective. Improving relations of the Western Balkan countries is a goal that should be fulfilled. The improvement of these relations is a commitment made by the countries themselves at the EU-Western Balkans Summit of Zagreb (2000) and Thessaloniki (2003). Regional cooperation is the way towards regional economic prosperity, social and economic stability.

It is very obvious nowadays that the responsibilities and benefits of the western Balkan countries are tied to the development and bilateral cooperation. Cooperation is an issue applied in different fields, the ones of cross-border nature, to political understanding, addressing to a social and socio-economic prosperity.

Regional cooperation is an important strategic approach of building positive relations. The Western Balkan countries should be opened to collaborate towards a sustainable economy, regional collaboration and partnership as factors of vital strategic importance of building positive relations among them.

I will do the analysis of the impact of such collaboration in in the economic cooperation, achieving economic stability and identifying the respective competitive advantages, strengthening regional market integration and mutual elimination of non-tariff trade barriers. In specific, in this paper I will focus on bilateral economic relations between Albania and Serbia in the frame of integration process.


“We note increasingly stronger support among the countries of the region for the development of regional ties. It is very encouraging that the areas of trade, energy and transport are among those where regional cooperation is the most substantial. Economic development is crucial if the region is to produce the jobs needed for its people. Further efforts are needed to increase trust and cooperation between peoples and countries. In the area of justice and home affairs, the countries need to enhance regional cooperation to achieve results.

Extended regional cooperation in south-eastern Europe is essential, regardless of the different stage of integration of the various countries, and an important criterion for the European course of the western Balkan countries. The stability, prosperity and security of the region are of significant interest to the EU. The EU will continue to foster all endeavours to promote regional cooperation.”

Perhaps the most tangible achievement of all lies in the fact that most of the Western Balkan countries are on a path towards European Union accession, something that seemed far off in the 1990s. It is incumbent upon us not to understate the serious challenges that lie ahead, both in terms of macroeconomic stability and even more so with regard to longer-term development. A key contribution of this book is to underscore the incomplete reform process in the region. We should be worried about this, as without further reforms the lackluster growth of recent years could become the norm, imperiling the convergence of living standards towards Advanced European levels, and denying employment opportunities to many in the region.


According to David Lipton, IMF first deputy managing Director, he transition from socialism to capitalism and democracy was less smooth than in other parts of Emerging Europe. But once the war ended and peace returned, these countries did more than rebuild: they began a transformation into market economies, liberalizing prices, privatizing many state- and socially-owned enterprises, and building the institutions needed to support a market economy.

On his report analyses the main economic developments and achievements in the Western Balkan countries, and lays out the key macroeconomic policy challenges for the future. While the collapse of communism 25 years ago marked the start of the transition to market economies for all Emerging Europe, the economic transformation of the Western Balkans really got going only after the conflicts that engulfed the region in the 1990s subsided. Hence, the past 15 years are the main focus of this report. The report is structured as follows. The overview chapter surveys the key findings and policy recommendations. Individual analytical chapters then focus in depth on the following key thematic issues: growth and structural reforms, macroeconomic developments and policies and the role of the IMF in the economic transformation, and the financial sector. Each analytical chapter concludes by outlining the key challenges that the Western Balkans face and suggests possible policy responses. Given that the Western Balkan countries are following the path previously taken by New Member States to become members of the European Union, the analysis relies heavily on comparisons between these two subregions. In compressing the experience of more than 17 countries over 15 very eventful years, the report inevitably focuses on broad themes, and cannot do justice to the nuance and diversity of individual country narratives. While the report highlights the role of the IMF during the economic transition, the Fund is only one of a number of agencies that have supported these countries over the past 25 years. In particular, the IMF may have taken a lead role in the early phases of transition, but for some Western Balkan countries the prospect of accession to the European Union has also been an important catalyst for reform. Other key players include the European Bank for Reconstruction and Development, European Central Bank, European Investment Bank, and World Bank, as well as bilateral country donors and private and voluntary sector institutions. But whether external assistance comes from the IMF or others, its impact pales in significance to the importance of domestically-driven reform and development, which is the principal subject of the report. The report was prepared by a team from IMF headquarters in Washington DC, IMF offices in the region, and the IMF’s Joint Vienna Institute (JVI). The views presented are those of the authors.


Regional cooperation is a principle of the highest importance for the political stability, the security and economic development of the western Balkan countries: Albania, Bosnia and Herzegovina, Croatia, the former Yugoslav Republic of Macedonia, and Serbia and Montenegro (including Kosovo, under the auspices of the United Nations, pursuant to UN Security Council Resolution 1244 of 10 June 1999). Many of the challenges facing the western Balkan countries are not only common to them but also have a cross-border dimension, which involves their regional neighbours.

Since the enlargement of 1 May 2004, the EU and the western Balkans have become even closer neighbours, and so the situation in the western Balkan countries, their progress on the road to European integration and their present and future relations with the EU really are of immediate concern to the EU itself. When Bulgaria and Romania become EU members, the entire western Balkan region will be surrounded by Member States of the European Union. This will have important repercussions for both the countries of the region and the EU in a number of areas, in particular where the free circulation of goods, services and persons are concerned. These challenges have to be addressed in the broader context of south-eastern Europe.

The different set of reasons – political, economic and security – for which regional cooperation in the western Balkans is crucial, are closely interlinked: for instance, regional stability and security are needed for economic development, which in turn favours stability and security in the region.

Since the Stability Pact was founded, the heads of state and government of the south-eastern European countries have met regularly for consultation. At the Bucharest Summit in February 2000, they adopted a ‘Charter on Good Neighbourliness, Stability, Security and Co-operation in South-eastern Europe.’ A range of co-operative relationships has replaced bilateralism. Most Stability Pact projects and activities were proposed and are carried out by two or more countries of the region.

Previously every country of south-eastern Europe had a big brother outside, and most of the countries of Europe had a preferred partner in the Balkans. That was the reason for many conflicts, sometimes even proxy-wars, or a reason why conflicts in the Balkans became wars in Europe. The Stability Pact is the political answer to this outdated political approach from the nineteenth century. The Pact has created an upward spiral of mutual trust and practical steps. But both sides are still mistrustful, watching to see that the other side delivers, gives indications of confidence-building and that the conditions are fair. Seems that the region is about to choose a positive and successful path: day by day, the Pact is building the new, wider Europe.

Why did the Western Balkans converge more slowly? One possible explanation is that the closer physical distance of the New Member States to advanced EU economies may have offered advantages in terms of access to markets and investments, and facilitated the transfer of knowledge. These relative advantages are only recently partially offset by improvements in infrastructure links between the Western Balkans and Advanced EU economies. Yet even after controlling for the physical distance, econometric evidence suggests that, except for the postwar recovery period, the pace of convergence in the Western Balkans has been slower than in the New Member States. This is partly due to the absence of convergence within the Western Balkan region, because poorer countries such as Albania and Bosnia and Herzegovina failed to grow significantly faster than the richer countries, such as Croatia. What other factors may have constrained faster convergence? There is a growing literature on the impact of structural factors on convergence, though mostly on larger panels of countries. Findings suggest that domestic financial development speeds up convergence and that human capital is more important to growth for countries that are less developed. Better institutional infrastructure and selected labor market reforms have been shown to facilitate convergence at the regional level (Che and Spilimbergo 2012). Reform priorities for sustaining convergence have been found to vary with income levels. Empirical evidence suggests that in lower-middle-income countries, priorities should be reforming banking and agricultural sectors, reducing barriers to FDI, increasing competition in product markets for a more vibrant services sector, improving the quality of secondary and tertiary education, and alleviating infrastructure bottlenecks. In upper-middle income countries, boosting productivity growth would require deepening capital markets, developing more competitive and flexible product and labor markets, fostering a more skilled labor force, and investing in research and development and new technologies (Dabla-Norris and others 2013). Finally, a survey of various studies that focus specifically on the transition process concludes that institutional quality and market liberalization policies to promote private sector growth have a positive impact on economic growth, despite their initially disruptive effect. In line with these findings, the analysis here shows that improving the quality of governance, and developing market-oriented institutions, a strong human capital base, and deeper financial systems help poorer countries catch up. In contrast, the dominance of the public sector in the economy hinders the catching-up process. And the Western Balkans have lagged behind the New Member States in these areas. In light of the critical importance of economic transformation, the next section explores progress to date.

The implementation of the economic collaboration is the way towards progress, standing for a multilateral agreement successfully applied in those countries. This framework should be assisted and monitored. This monitoration should include evaluation of the economic outcomes as far as provide a full vision of the potential benefits and on reducing the trade costs and increasing trade.


Reforms are considered potential drivers to regional market development and integration.

1. Institutional Reforms.

The protection of property rights is a common problem in most of the Western Balkan countries, particularly relative to the EU average, though to a lesser extent in FYR Macedonia. Indicators related to corruption and government inefficiency also point to reform gaps in most countries. Compared to NMS, inefficient government spending appears to be an important constraint in Serbia, Albania, Croatia, and Bosnia and Herzegovina. In Serbia, and to a lesser extent in Croatia, Bosnia and Herzegovina, Albania, and Montenegro, reform needs are large in areas linked to corporate sector performance. Specifically, this includes the strength of reporting standards, efficacy of corporate boards, and protection of minority shareholders. Encouragingly, Albania, Bosnia and Herzegovina, FYR Macedonia, and Montenegro score relatively well in terms of burden of government regulation, even compared to the EU average. For Croatia and Serbia, however, the gaps in this area remain large.

2. Infrastructure.

The analysis of specific reform gaps within the broader infrastructure pillar suggests that the Western Balkan countries have had a mixed performance when assessed vis-à-vis their peers. In terms of overall quality of infrastructure, Croatia ranks better than its New Member State peers, while the largest overall quality gaps exist in Bosnia and Herzegovina and Serbia. All Western Balkan countries, except Croatia, lag behind the EU by a wide margin. The gap analysis points to important reform potential in railroad infrastructure in Albania, FYR Macedonia, and Serbia. Compared to the average EU country, road and air transport infrastructure gaps are large in all countries, though to a lesser extent in Croatia.

3. Goods Markets Efficiency.

The results of the analysis suggest that the Western Balkan countries impose a relatively low tax burden on businesses. Total tax rates are well below those of NMS and EU average in FYR Macedonia, Montenegro, and Bosnia and Herzegovina. Similarly, all countries but Bosnia and Herzegovina perform well or are broadly at par in terms of procedures and time to start a business. Gaps in competition policy, measured by the intensity of local competition and the effectiveness of anti-monopoly policy, point to potential reform needs in this area.

Gaps in trade barriers, tariffs, and impediments to foreign ownership and foreign direct investment (FDI) are relatively moderate in most Western Balkan countries, but almost always negative. Rules on FDI and foreign ownership seem to be stricter in Croatia and Serbia. Agricultural policy cost seems to be a significant burden for the economy in Croatia and Serbia, and to a lesser extent in Albania.

Labor Market Efficiency Performance of regional labor markets, when benchmarked against New Member State peers, is relatively mixed, as measured by indicators on the flexibility of setting wages, flexibility of hiring and firing, and redundancy costs. All of the Western Balkans lag behind their peers in at least one of these three areas. Croatia has relatively more inflexible hiring and firing rules, and stronger tax disincentives to work but relatively more flexible wage setting. The labor tax wedge is also relatively large in Serbia. In contrast, Albania and Bosnia and Herzegovina score lower in terms of flexibility of wage setting. Most of the Western Balkan countries (except Albania and Montenegro) compare less favorably to the New Member States in terms of retaining and attracting talent, contributing to skilled labor shortages. In these areas, as well as in professional management and cooperation on labor-employer relations, gaps tend to be larger vis-à-vis the EU. In other areas, differences with respect to the EU are less important, reflecting significant labor market rigidity in both sets of countries.

The economic development is certainly tied to the political stability which make the direct approach to the regional cooperation. This kind of approach builds strong relations between the western balkan countries. The non-tariff trade is a way of having a sustainable future not only for the country itself, but even for the region. Accompanying that to the other key factor of political stability, sees to be the right way of non forced, natural cooperation towards the bright economic future of these countries.


The event on February 24th – the first all-inclusive Western Balkans summit at the EBRD – will provide an ideal opportunity for business leaders and international companies to learn more about the countries and the Bank’s role in them.

“The idea is to present this region as a whole as an investment destination,” said the EBRD’s Senior Political Counsellor Oleg Levitin. “We hope that this conference, besides facilitating much needed foreign investment, will send a very strong political message about the maturity and stability of the region.”Regional integration through road corridors, gas pipelines, expansion in the manufacturing sector and other projects will be at the top of the agenda.”We believe that regional integration needs to be made a priority,” said Claudio Viezzoli, the EBRD’s Director, Western Balkans.

The EBRD sees supporting and promoting the Western Balkans as particularly important to foster the region’s development by strengthening its potential. The countries benefit from the IFI Joint Action which includes more than €30 billion of joint commitments for the period 2013-2014 in Central and South Eastern Europe as a whole.In the Western Balkans and Croatia alone the EBRD invested in more than 80 projects totaling more than €1.2 billion in 2013. This was a new record. Over the years, the total of EBRD investments in the region has reached €10.5 billion.

The Bank is active in all sectors of the economy but has a targeted approach in each country, based on the individual country’s needs and priorities as defined in the respective country strategies. A major goal of the EBRD’s increased engagement in the region in recent years has been to support the countries in their response to and overcoming the financial crisis which had hit the region hard.

After a protracted period of contraction, in 2013 the countries again registered growth of 2 per cent on average and prospects for growth in 2014 are similar. Particularly interesting for investors are the significant catch-up potential and the efficiencies of increased cross-border economic activity.

The attractiveness of the region for foreign investment has increased thanks to improved political stability and progress in the Euro-Atlantic integration in recent years. Croatia became a member of the European Union in 2013, and Montenegro and Serbia are in the process of membership negotiations. Other countries are continuing on the course of EU approximation. At the same time intensified regional cooperation has significantly brightened economic prospects and the region’s stability.

The EBRD sees itself as a supporter of these processes, a promoter of the interests of the Western Balkans and a door-opener for international and regional investors contemplating an engagement in the region.The countries have a lot to offer: from fertile soil to a strong industrial tradition, from vibrant entrepreneurship to a proud history of innovation, from rich natural resources to a skilled and educated labour force and to stunningly beautiful landscapes – the Western Balkans have it all. The Western Balkans investment forum offers a unique opportunity to learn more about the countries and the region and to get in touch with key decision-makers and business representatives.

Having a stability in politics and regional cooperation make the Western Balkan countries interesting to generate new employments as a result of positive impact in the economy. The gain in this case will be more collective than individual. Negotiations should be strengthened. There are lakes and rivers shared by these countries, therefore specific regional cooperation is needed.


Free trade

Regional trade liberalisation is progressing. A network of bilateral free-trade agreements among the countries of the region, including Romania, Bulgaria and Moldova, has been established, thus creating a free-trade area of 55 million consumers. This sends an important signal to the investor community, which will find a market of high absorption potential for industrial and consumer goods. To reap the full benefits of trade liberalisation in the region, the free-trade agreements need to be fully and efficiently implemented. The countries of the region committed themselves to complete the network of free trade agreements. Regional trade across south-eastern Europe is fully in keeping with the EU perspectives of the different countries in the region, independently of where they stand on their way to membership. Trade liberalisation and facilitation is one of the pillars of the stabilisation and association process (SAP): a main instrument of the SAP is the autonomous trade measures that the western Balkan countries enjoy – free access, without quantitative limit, to the EU market for practically all products.

Energy and transport infrastructure

Significant progress is being made on forming a regional energy market and rebuilding infrastructure. The projected south-eastern Europe regional energy market, which should provide modern and liberalised gas and electricity systems, will be key to a regional energy market based on European standards, transparent rules and mutual trust, and it will set the right environment for the optimal development of the energy sector. The agreement governing energy trade will substantially contribute to attracting investment into this strategic sector. Where transport infrastructure is concerned, an integrated regional transport strategy, consistent with the trans-European networks and taking into account the pan-European corridors, is a high priority. The EU also supports projects of regional significance and regional initiatives in the areas of environmental protection, science and technology, information and communication technology, and statistics.

Fight against organised crime and corruption

Organised crime and corruption are threats to security and democratic stability, and obstacles to the rule of law and economic development in the region. Combating organised crime and corruption is a key priority for the governments of the region. Particular focus is being placed upon fighting all forms of trafficking, particularly of human beings, drugs and arms, as well as smuggling of goods. Strengthening the regional operational cooperation for police and prosecution is considered a key priority for the countries of the region.

EU assistance

To promote regional cooperation in priority areas, the EU is providing political support, practical/technical guidance and financial assistance through the CARDS programme (Community assistance for reconstruction, development and stabilisation), which is one of the main instruments of the stabilisation and association process.

Priority areas where regional CARDS assistance will be focused for 2005-06 are listed below.

• Institution building: this priority focuses primarily on strengthening the administrative capacity of the countries, and support to public administration reform, through instruments implemented regionally.

• Justice and home affairs: actions in this field have a special focus on the fight against organised crime and corruption, and include enhanced police regional cooperation and judicial regional cooperation.

• Cross-border cooperation: by promoting economic and social cooperation of border regions, including support to networking activities and the involvement of civil society. The EU supports the development of cross-border cooperation between the western Balkan countries, as well as between these countries and EU members, acceding and candidate countries.

• Private-sector development, by facilitating foreign direct investments in the region.

• Infrastructure development, through initiatives in the sectors of transport, energy, environment and information society.

Considering that in the Balkan countries exist multi-ethnic societies, should be a positive thing in terms of trade, because minority groups should be seen as an added value for the implementation of the non-tariff trade. The elimination of the barriers is an important factor that is representing the approach of positive relations between those countries.

Cross-border finance is the future of Western Balkan countries. Although traditional trade barriers such as tariffs have come down, and innovations in transportation and communications technology have shrunk the distance between nations, trade costs remain high, particularly in developing countries. High trade costs isolate developing countries from world markets, limiting their trade opportunities and impeding growth. High trade costs also appear to disproportionately affect small and medium-sized enterprises (SMEs), time sensitive products and goods produced in global value chains. Trade procedures that are more cumbersome than necessary and delay the movement, release and clearance of goods constitute a significant part of these trade costs. Trade facilitation is intended to relieve these bottlenecks at the border. The WTO’s Trade Facilitation Agreement (TFA) represents an important milestone by creating a multilateral framework for reducing trade costs. While changes in trade procedures can be implemented unilaterally, a multilateral agreement on trade facilitation brings added value. It provides greater legal certainty to the changes in measures. It helps reforming governments to marshal support from domestic constituents. Finally, it helps with the adoption of similar or compatible approaches to trade procedures and coordinates the provision of donor support for capacity-constrained developing countries.

Cooperation in the region represents a key element for the development of the Western Balkan in general, and a powerful collaboration towards an integrated market. Stability Pact has played an important role in the cooperation between the countries of Western Balkans. It is obvious that it many initiatives in order to promote democratic stabilization and economic development in the Western Balkan countries.


The Western Balkan financial systems need to deepen further and broaden access to financial services while preserving and enhancing financial system stability. Reforms are needed to reduce market imperfections and information asymmetries, and to allow for efficient intermediation of credit to finance investment. While Western Balkan countries have done relatively well in providing the infrastructure necessary for financial development more generally and credit deepening in particular, they have lagged their New Member State counterparts in strengthening the foundations of financial stability.

By intensifying cooperation between Balkan Countries,can turn into an element of integration, progress, stability and cooperation in the region. The European perspective of both countries will be a common good and cooperation factor for both countries. The two countries seem determined to cooperate in terms of economic exchange and cooperation as part of the new EU perspective on the Western Balkans (launched in Berlin by the German Chancellor in August 2014) and the South-East European Cooperation Process (SEECP).

They should have some common priorities that will guide them to a successful economic perspective besides the clear EU path that have towards. Strengthening their trade dynamics is an ambitious cooperation framework.

Emerging Business Opportunities in the Renewable Energy Sector in India


The New and Renewable Energy sector has gained widespread attention in recent years. The renewable energy sources are crucial not only for achieving energy security but also for environmental sustainability. The globalization has lead to a rapid increase in the demand for the energy and there is an increased thrust on alteration of the existing energy mix. In India, the government has implemented various initiatives for the promotion and development of the renewable energy sources, such as, solar energy, wind energy, bioenergy, geothermal energy, etc. The aim is to promote the utilization of the renewable energy sources through the policy reforms, public-private partnership and development of the Ultra Mega Power Projects (UMPP). The current share of the potential renewable energy in the energy mix stands close to 15%. The estimated renewable energy potential from commercially exploitable sources for India is around 900 GW with a total installed capacity of around 310 GW. Thus, there is huge scope present in this sector. The government has implemented various projects in the renewable energy sector with an emphasis on research and development, technical and financial support, public awareness and public-private sector synergy. The Ministry of New and Renewable Energy (MNRE) focuses on the deployment of the projects and incentives through participation from the states and various administrative levels. Regulations have been specified at the state level for promoting renewable energy projects in the respective states. There are, however, constraints present in the realization of the renewable energy mission in terms of credit risk, technical risk, policy risk and social factors, which may lead to delays as per the anticipated results. The other important factor is to attract new entrants in this sector by ensuring credible and genuine returns, expansion opportunity and flexible regulatory norms. It is also crucial to ensure that the benefits are extendable to the community, in terms of job opportunities, increased standard of living and environmental sustainability.

Green Entrepreneurship

Green Entrepreneurship is essentially concerned with the innovative business aimed to address the issue of environmental concerns and offering solutions to mitigate the associated problems. These businesses leverage the opportunities that exist in the environmental sector and deploy measures for the sustainable development of the society. The recent upthrust by the government is enabling diverse opportunities for these entrepreneurs to gauge in the renewable energy sector.

Current Scenario

The renewable energy sector offers wide opportunity in terms of growth and environmental sustainability. There is however a need to consider the evaluation and bench-marking criteria for the businesses in this sector. There is also a lack of cost effective strategy for the same in the Indian scenario. The enterprises are marred by high initial costs and computation methods for the estimation of capacity. This is further exaggerated by the lack of domain expertise and limited awareness and motivation among the people. The government, although, has developed policies for supporting the green entrepreneurship and has provided different incentives, but this support seems to be limited in its reach. This allows for limited indulgence of the businesses in the sector.


The acceptance and credibility of the business is a critical factor for the success of a green entrepreneurship venture. There is plethora of opportunities in the various domains of the renewable energy sector. These domains include the solar energy technology and installation, bio-fuel generation, bio-fertilizers, consulting services, etc. The government has initiated various programs to support the entrepreneurship in the country, particularly in the renewable sector. The benefits are provided in terms of incubation centres and mentorship. There are also firms and investors available in the market, to lend support for the green business initiatives. The focus is not only on the generation of the renewable energy, but it also encompasses the storage and distribution of the energy. Thus, there is wide variety of options available in terms of market and finances.


The following recommendations aim to provide the guidelines to the entrepreneurs to identify the suitable domain in the renewable sector. These are based on the premises of selecting the business vertical as per the base location, energy source, government incentives, etc.

1. The entrepreneurs need to develop an understanding about the different types of sources together with an emphasis on the feasibility for realizing the potential of the different sources in their base state. The primary focus should be to evaluate the harness potential of the sources based on economic and technology front. The existing status of industrial area in the area should be determined to generate an overview of the industrial scenario of the state.

2. The available harnessing potential should be evaluated as per the different methodologies and technicalities. For instance, in case of solar energy utilization, there are different methods of solar energy usage, such as Grid-connected solar generation, Phase Change Materials (PCM), Rooftop solar power projects, etc. Also, the analysis of the resource potential of the region should be in terms of area availability, wind/sunny days, availability of biomass and its accumulation, suitability of land in terms of jatropha cultivation, etc. The implementation guidelines should be highlighted based on census data analysis.

3. The existing regulatory and infrastructure framework in the renewable energy sector should be studied. Also, the other crucial factors are the provision of the economic and administrative support.

4. The enterprises should study the project implementation examples in the sector from different states, to identify the existing gaps and developing solutions to bridge the same.

5. Identifying the technical, social and political barriers in the implementation of renewable energy projects is crucial, particularly in the initial stages. One important part is to enhance the knowledge about this sector among the masses. Also, it is critical to identify the possibility and plan for achieving the public and private sector synergy in this sector, particularly in the initial years of project development.

6. Generating an understanding the plausible impact of the Goods and Services Tax (GST) and other initiatives by the government, like ‘Make in India’ and ‘Stand-up India’ on this sector.

7. Estimating the potential for the generation of employment opportunities and enhanced standard of livelihood of the local population due to the promotion of this sector. It is imperative to identify the support of the local Self Help Groups (SHGs), NGOs and local societies in this regards.

8. Identifying the different specialization streams for the MSMEs in the sector. For instance, MSMEs may chose to focus on solar cookers, solar powered bulbs, contracting of wind turbines, etc.


This sector provides a productive opportunity in terms of profitability and environment sustainability. There are different incentives and policies by the government for the promotion and development of green entrepreneurship in the country. The entrepreneurs have an option to select the different domains in the sector based on the technical functionality and the sustainability as per the area of operations. The recommendations provided in the articles serve as a guideline, however, due caution should be taken while accounting for the external environment and the associated variability.

Ineffectiveness of Development Aid For Developing Countries

In 1945, the United Nations Organization (UNO) was established to avoid a new world war. Another goal of the UNO was to eradicate poverty in the developing countries. This goal was and is still is a very important reason for the existence of the UNO. The most important ‘instrument’ to fulfill was the creation of the International Bank for Reconstruction and Development (IBRD) or better known as the ‘World Bank’. In October 2005, the UNO celebrated its 60th anniversary. What has it accomplished in terms of eradicating poverty in developing countries? The sad truth is that 80% of the world population controls only 20% of the world’s resources; this means that 20% of the population controls 80% of the world’s resources. This is not some sort of ‘secret’ fact, but something that most people know. Why is this sad reality a fact?

The first problem is related to the policy process itself. This process is unfortunately not being done in a straightforward and rational way; on the contrary. It is full of ambiguities and conflict. The second problem I would like to discuss in this article can be found in the theories of development. I have never encountered a universal theory of development. This is not surprising because the strong impact of theories of development on policies for development is not fully realized. Consequently, policies of development are always incomplete because there is no universal strategy available to cope with the problem of development.

Development aid policy
In general, the literature concerned with the policy process is dominated by a particular view. This view is connected with the ‘rational-actor paradigm’. In this rational-comprehensive-policy model, the decision-making process is purely based on rational and objective criteria. The role of objectively acquired information forms the basis of policy in this model. This standardized model is assumed to be universally applicable in every policy ‘system’, sector, or problem.

The following aspects represent this model:

1. Clarification of values or objectives distinct from and usually a prerequisite to empirical analysis of alternative policies;
2. Policy formulation is therefore approached through means-end analysis. First the ends are isolated, then the means to achieve them are sought;
3. The test of a good policy is that it can be shown to be the most appropriate ‘tool’ to achieve certain ends;
4. Analysis is comprehensive; every important and relevant factor is taken into account;
5. Theory is often heavily relied upon.

The separation of policy preparation or planning and execution or implementation is a vital characteristic in the rational comprehensive methodology. Implementation is being seen as a logical outcome of a well-prepared and formulated plan. But in the implementation of the aid policy, numerous projects failed due to negligence of the execution of the goals formulated. This implementation problem is not only limited to development aid policies, but it has also been traced in numerous other policy fields.

A second property of the rational-comprehensive model is the consensus of the problem. It is being presumed that the development of a certain country is not problematic at all. All parties involved (donor and developing country) have reached an agreement and the strategy chosen is therefore the result of a consensus of all parties involved. None of these are true in reality. Development aid policy is the result of negotiations between the actors involved. Actors with business interests, actors from the developing countries self and last but not least, the actors with political interests are constantly engaged in negotiations. It is not difficult to imagine that the actor with the strongest bargaining position possesses the power to overwhelm the actor actors. It is not the objective scientific planner or other kind of specialist who has the final word. In most cases, it is the most powerful actor(s) who wins.

A final aspect related to this model is the role of objective knowledge as an important pillar in the decision-making process. It is being assumed that knowledge is the key to success. The more knowledge about the issue is available, the easier it is to solve the issue, in this case, the ‘development problem’. This knowledge does not come from a magic box. On the contrary, it comes from strict scientific research. So, scientific research is the source of knowledge and henceforth plays a crucial role in policy-making processes. The influence of the actors is neglected because they have reached a consensus. In reality, scientific research plays a very marginal and minor role in the policy-making process. Policy makers only use scientific findings when it is in accordance with their own ideas. Policy makers draw policies on the bases of their own good judgments and experience and not on scientific findings. Afterwards, they tend to seek objective findings which actually support their policy which has been formulated long before.

Theories of development

The reader should be warned because I cannot give a complete sketch of the existing theories of development, only a few important theories will be discussed. In the fifties, modernization theories dominated the foreign aid of the ‘developed to the underdeveloped countries’. Development is being seen as a linear progressive movement of a ‘traditional’ society into a state which can be perceived as being a ‘modern society’. The example of the emergence of the nations in the Northern hemisphere is being used to define the term ‘modern’. Furthermore, the development is being seen as a result of technological innovations. The World Bank can nowadays still be identified as the major producer of the modernization theory. Economic growth is the key concept in this theory. If the shortage of capital problem in the developing countries is solved, poverty will vanish and an autonomous process of development will come into motion. Economic dualism – the existence of, on the one hand, a modern export-oriented sector in the economy and a local sector producing domestic commodities on the other hand – is being seen as an obstacle. The traditional sector (or informal sector) must be eliminated in this view.

The developing countries in turn, reacted by introducing their own theories. In the years 1949-1950, Prebisch (the secretary of the Economic Commission for Latin America) posed a theory called the center-periphery vision. The economies of the Latin American countries are situated in the periphery, whereas the industrialized western countries are situated in the center. In order to change this situation, which only preserved underdevelopment, Prebisch proposed to introduce rapid industrialization by substitution. The dependencia school (advocated by Frank and Dos Santos) goes even further than the center-periphery school. In this school, the importance of the form and intensity of international relations are being stressed as a strong variable which affects economic progress in developing countries.

In the west, new thoughts arose as a reaction to the deficiencies of the ‘traditional’ views. The so-called unified approach emerged (advocated by Myrdal and Gamini Corea – secretary of UNCTAD and UNRISD). The most important argument of this approach is that aid must be directed towards the groups with lowest incomes or who are the poorest. But the developing countries did not accept this modified view because they experienced it as an intervention in their own internal affairs. In addition, the developing countries demanded a New International Economic Order. This New Economic Order should be based on justice, sovereign equality, mutual dependency, common interests and cooperation between all states. Unfortunately, the structural changes of the international system in favor of the third world have not happened. But the discussion around the New Economic Order resulted in the so-called Rio-project. The members of the Rio-project developed a new development strategy where the emphasis is laid on the self-reliance aspect of the developing countries. But the western nations have not stimulated this self-reliance concept.

Personal reflections

I have lived for more than 30 years in a developing country (Indonesia) and this country has received billions of dollars in terms of aid and loans. What is the end result? Tens of millions still live in poverty. With the exception of the lucky few, some have been able to improve their lives thanks to a combination of education and luck. A minority (mostly of Chinese descent) has been able to improve their situation due to their skills as traders. However, corruption is rampant and the new-born democracy has not been able to solve all these problems. It will take many years before so-called ‘sustainable development’ can be achieved. Even with educating more people, the situation will not improve in the short term. Despite the availability of abundant natural resources, the situation remains dim. If nothing is done against deforestation, all the tropical forests in this country will be gone in 2010; that is only four years from now. The situation might even get worse due to the inability of the majority to compete with other countries in terms of industry, trade, and services.

Better future?

Nowadays, everybody is talking about globalization as the ‘cure for all diseases’.
The developing countries, however, are still suffering from underdevelopment, poverty, and human rights violations. How can globalization solve all these problems? The dawn of the 21st century is not marked by a better global situation, but by more global instability with individual states scrambling for nuclear weapons, a senseless ‘war against terrorism’, destruction of the environment, and doubling of the population in the next 40 years. It will take a lot effort from all people in the developed and the developing world to solve all these problems and create a better world for our children and grandchildren.


Across industry, many definitions are used when it comes to the different
types of maintenance. It can quickly get confusing when people talk about
preventive maintenance, condition based maintenance, predictive
maintenance but actually, have something else in mind than you do. Some
people get very excited about these definitions and can spend a lot of time
on for example disagreeing with what is and what isn’t preventive
maintenance. Let’s not do that, instead, I’ll offer you my view on the different types of maintenance.


As far as I am concerned, terminology is not important. Other than making
sure we are talking about the same thing. If what I consider to be condition
based maintenance, you call predictive maintenance that doesn’t really

As long as we can sensibly talk about the underlying principles.

When to use condition-based maintenance. And how to use it.

However, as I’m often asked questions about the different types of maintenance I decided to put a quick overview together of the types of maintenance.

At least, the way I see it:


At the top level, I see maintenance being either preventive or corrective:

When we do preventive maintenance we are doing a task before a failure
has occurred. That task can be aimed at preventing a failure, minimising
the consequence of the failure or assessing the risk of the failure occurring.

When we are conducting corrective maintenance the failure has now
occurred and we are basically reinstating equipment functionality. To be
clear, corrective maintenance can be the result of a deliberate run-tofailure


Preventive maintenance can be defined as “an equipment maintenance strategy based on replacing, or restoring, an asset at a fixed interval
regardless of its condition. Scheduled restoration tasks and replacement
tasks are examples of preventive maintenance tasks.”

Preventive maintenance (or preventative maintenance) is basically a type
of maintenance that is done at a regular interval while the equipment is
still functioning with the objective of preventing failure or reducing the likelihood of failure.

Preventive maintenance can be time-based i.e. every week, every month
or every three months. But preventive maintenance can also be based on
usage e.g. every 150 cycles, every 10,000hrs or like your car: service every

Apart from the regular interval approach (time based maintenance) there
are also other types of maintenance that fall within the category of preventive maintenance:

} Time Based Maintenance (TBM)
} Failure Finding Maintenance (FFM)
} Risk Based Maintenance (RBM)
} Condition Based Maintenance (CBM)
} Predictive Maintenance (PDM)

In the rest of this article I will explore each of these types of maintenance
in more detail including when you should consider using them.


Time Based Maintenance refers to replacing or renewing an item to
restore its reliability at a fixed time, interval or usage regardless of its
condition. This is what Moubray calls Scheduled Restoration or Scheduled
Discard tasks in his RCMII book.

I limit the use of that phrase, as for some reason people then jump to the conclusion that other maintenance is not scheduled. When in fact of
course all maintenance should be scheduled through our Weekly
Schedule. The only exception would be Emergency Maintenance, which
due to its very nature of requiring immediate attention cannot be

The purpose of Time Based Maintenance is to protect yourself against the
failure of known wearing parts which have predictable Mean Time
Between Failure (MTBF) i.e. Time Based Maintenance assumes that the
failure is age related and a clear service life can be determined. Or, that it’s simply not worth the effort to assess the condition and a time based replacement is more economical and still (reasonably) effective.

Time Based Maintenance can never effectively manage non-age related failure modes and therefore should only form a small part of your overall
maintenance program as >70% of the failure modes in your plant are not
age related (refer to the article 9 Principles of Modern Maintenance).


Failure Finding Maintenance tasks are aimed at detecting hidden failures
typically associated with protective functions. Think pressure safety
valves, trip transmitters and the like.

This type of equipment won’t be required to function until something else
has failed. That means that under normal operating conditions you will not
know whether this equipment is still functional i.e. the failure modes are hidden.

And since these failures are hidden, you’ll need to find them before you
are relying on that equipment to protect you. Simple really.

It’s important to realise that failure finding maintenance tasks do not
prevent failure but simply detect it. And once detected you’ll have to
repair the failure you found. Failure Finding Maintenance is conducted at
fixed time intervals typically derived from legislation or risk based approaches.


Risk Based Maintenance (RBM) is when you use a risk assessment
methodology to assign your scarce maintenance resources to those assets that carry the most risk in case of a failure (remembering that risk =
likelihood x consequence).

As a result, equipment that has a higher risk and a very high consequence
of failure would be subject to more frequent maintenance and inspection.
Low risk equipment may be maintained at a much lower frequency and
possibly, with a much smaller scope of work.

When you implement a Risk Based Maintenance process effectively you
should have reduced the total risk of failure across your plant in the most
economical way.

Risk Based Maintenance is essentially preventive maintenance where the
frequency and scope of the maintenance activities is continuously
optimised based on the findings from testing or inspection and a thorough
risk assessment. Examples of Risk Based Maintenance would be Risk
Based Inspection (RBI) as applied to static equipment like vessels and
piping or even pressure relief valves.


Most failure modes are not age related. However, most failure modes do give some sort of warning that they are in the process of occurring or are about to occur.

If evidence can be found that something is in the early stages of failure, it
may be possible to take action to prevent it from failing completely and/or to avoid the consequences of failure. Condition Based Maintenance as a strategy, therefore, looks for physical evidence that a failure is occurring or is about to occur.

Thinking of CBM in this way shows its broader applications outside condition monitoring techniques often only associated with rotating equipment.

An important concept within Condition Based Maintenance is the P-F
curve shown in the figure below:

The curve shows that as a failure starts manifesting, the equipment
deteriorates to the point at which it can possibly be detected (point “P”).

If the failure is not detected and mitigated, it continues until a functional
failure occurs (point “F”).

The time range between P and F, commonly called the P-F interval, is the
window of opportunity during which an inspection can possibly detect the
imminent failure and give you time to address it.

It is important to realise that CBM as a maintenance strategy does not reduce the likelihood of a failure occurring through life-renewal, but
instead is aimed at intervening before the failure occurs, on the premise
that this is more economical and should have less of an impact on
availability. In other words: condition monitoring does not fix machines and condition monitoring does not stop failures. Condition monitoring only lets you find problems before they become a failure.

A common rule of thumb is that the interval between CBM tasks should
be one-half or one-third of the P-F interval.

How much more effective CBM is above breakdown maintenance depends on how long the P-F interval is. With plenty of warning the rectification can be planned, materials and resources can be mobilised and breakdown prevented (though production is still stopped for the maintenance duration). When the P-F interval is only a few days the resulting organisational and workplace actions are much like a breakdown and the value of CBM is largely lost.

For CBM to be effective as a strategy, early intervention is essential. This
requires an efficient and effective process for data gathering, data analysis, decision making and finally intervention.

For failure modes where the P-F interval shows a large variability, condition monitoring is not an effective strategy.

If you’re interested to find more about how to best manage failure modes
don’t forget to check out the article Reliability Centered Maintenance – 9 Principles of Modern Maintenance.


Up until recently when people spoke about Predictive Maintenance (PDM)
this was usually as a synonym for Condition Based Maintenance. But in my
view with the advent of Artificial Intelligence, much lower costs of
equipment sensors (IIoT – Industrial Internet of Things) and machine
learning there is clearly a difference appearing between Predictive Maintenance (PDM) and Condition Based Maintenance (CBM), at least in my view.

I see Predictive Maintenance as an extension, a more advanced approach
to CBM where we use potentially many process parameters gained from online sensors to determine if our equipment is moving away from stable
operating conditions and is heading towards failure. A condition assessment that is extrapolated to make a prediction when failure is
expected to occur.

There are a lot of (very large) companies actively moving into this space
and it is certainly a fast-moving and exciting part of our discipline as
Maintenance & Reliability Professionals. However, I do still believe that
even the most advanced Predictive Maintenance approaches need to be
underpinned by sound reliability principles and understanding.


A Run to Failure or Corrective Maintenance strategy only restores the function of an item after it has been allowed to fail. It is based on the
the assumption that the failure is acceptable (i.e. no significant impact on
safety or the environment) and preventing failure is either not economical
or not possible.

Apart from being the outcome of a deliberate Run to Failure strategy
Corrective Maintenance is also the result of unplanned failures which
were not avoided through preventive maintenance.

A run to failure strategy can effectively be used for general area lighting, smart process instrumentation (without trip functionality) etc. where the consequence of failure is limited and would not necessitate a need for an urgent repair.

When opting for corrective maintenance as a strategy it is essential to ensure that the failure modes under consideration do not have the potential to become Emergency Maintenance.

You see, if you adopt run-to-failure for equipment that once it has failed
must be restored immediately to have doomed your organisation to a
reactive maintenance environment.

A reactive maintenance environment is not where you want to be. It is more expensive, less efficient, and less safe. So although a run-to-failure strategy can sometimes be a good option, make sure you decide wisely.


In the chart of maintenance types I broke ‘corrective maintenance’ into
two sub-types:
> Deferred corrective maintenance
> Emergency maintenance

And that was very deliberate because it is so essential that we absolutely minimize the amount of Emergency Maintenance we allow into our organisations.

As I already pointed out above Emergency Maintenance is expensive, various sources have suggested that Emergency Maintenance is 3 to 5 times as expensive as ‘normal’ preventive maintenance. Emergency Maintenance typically leads to longer equipment outages and more production impact. And it is less safe.

So when a corrective maintenance work request is raised it is essential
that you prioritise it properly to make sure that where possible you defer
the work request and give your team the time to properly plan and
schedule the work.

If you want to read more about prioritisation of corrective maintenance
have a look at the article You Will Fail Without Planning & Scheduling.


Emergency Maintenance is corrective maintenance that is so urgent that it
breaks into your Frozen Weekly Schedule (you do have one don’t you?). It
upsets your plans and schedules and typically throws everything into
disarray. Some people thrive in this type of environment and often get
heralded as heroes when they’ve worked 16hrs non-stop to get
production back online. But when it comes to the Road to Reliability it is a dead end.

Emergency Maintenance is the one and only maintenance type that we
really want to avoid as much as possible. In fact, World-Class
organisations ensure that less than 2% of their total maintenance is Emergency Maintenance. How much Emergency Maintenance do you


The table below shows a brief summary of:
> the different types of maintenance;
> what type of tasks are involved;
> the objective of the task;
> and how the interval between the tasks is determined.

An efficient and effective Preventive Maintenance Program will have a mix of all these different types of maintenance.


And frequently asked question is ‘what is breakdown maintenance’ and as
it’s not in my explanation I thought I’d just covered it here briefly. As far as I am concerned, breakdown maintenance is simply corrective maintenance
and not another type of maintenance in itself. In the case of breakdown
maintenance, you’ve had a failure and so now it needs to be fixed. And
depending on the risk associated with that breakdown it could be urgent
or less urgent.

But, in many people’s mind, breakdown maintenance is urgent maintenance, maintenance that needs to be done right now i.e. Emergency Maintenance. And if that’s the case for you, you know what to do: get rid of it!


I think I have covered this in the article, but as it’s such a frequently asked question I’ll just summarise the key differences here:

Preventive maintenance covers multiple types of maintenance that are
used before a failure has occurred. Predictive maintenance is a form of
preventive maintenance.

When most people talk about preventive maintenance they really mean Time Based Maintenance which is a repair or replacement on a fixed
interval irrespective of the condition of the equipment. The interval can be
time-based (days, weeks or months) or usage-based (operating hours, cycles or km).


The above table of types of maintenance does not include Autonomous
Maintenance or Autonomous Care (also referred to as Front Line
Maintenance in other organisations). The CLAIR (Clean, Lubricate, Adjust,
Inspect and Repair) activities conducted under Autonomous Care are
essentially a combination of the above strategies, but conducted on a
higher frequency by frontline staff.


Erik Hupjé is the founder of the Road to Reliability™ and has over 20 years’ experience in asset management, and specifically managing maintenance & reliability. He has worked in the Netherlands, the United Kingdom, the Philippines, the Sultanate of Oman, and Australia.

Erik has a passion for continuous improvement and keeping things simple. Through the Road to Reliability™, he helps Maintenance & Reliability professionals around the globe improve their plant’s reliability and their organisation’s bottom line.


I wrote this article based on a number of key sources listed below (and throughout the article):

The Professional’s Guide to Maintenance and Reliability Terminology by Ramesh Gulati, Jerry Kahn and Robert Baldwin, accessed in June 2018 at

The Challenges Faced by International Business

This article examines how the environment affects and creates conditions for either the success or failure of business organizations and how it operates to demand effective strategic thinking on the part of decision-makers if businesses are to survive and thrive.

Take the classic example of Mark & Spencer PLC, which began in 1894 as a single high street store owned by two men, selling all items said to be costing no more than a penny to the customer. Over the years it conquered the retail sector with branches in prime locations all over the UK, and in overseas territories, totalling more than 885 stores. Not only did Marks & Spencer evolve into the giant corporation which it is today by reading the changes in the environment well, and meeting the growing needs of more and more affluent consumers, it also influenced the shopping habits of its clients. The business firm is not a faceless entity; at best, it can be an icon of social and economic progress, and at worst become vanquished by its inability to read the environment, Woolworths and MFI being two recent examples of such failure.

How the environment impacts on the fortunes of the business firm is nowhere more evident than in the collapse of many business enterprises including financial institutions (e.g.banks) in the current worldwide economic downturn. Even starker is the effect of continuing bad weather either in the form of floods or snow on the viability of a whole range of firms in the UK. Had the environment represented by the UK government not provided a lifeline to some of the major banks in the form of taxpayer subsidies, or buy-outs, they would not have survived. Different political ideologies at different times affect the business enterprise in different ways. The collapse of communism and the breaking down of the Berlin wall in 1989, coupled with the Internet phenomenon resulted in the abolition of legislation preventing global communication and industrialisation. Since then there has been a plethora of international mergers, acquisitions and alliances which saw transnational corporations (TNCs) grow in size and economic power as never seen before. Denning (1993) has identified the interaction between ownership advantage (OA) brought by the TNC and the location advantage (LA) of the countries where TNCs seek to invest. Researchera identified synergies sought by TNCs in foreign direct investment (FDI) as being motivated by strategies for market seeking (MA), efficiency seeking (ES), and knowledge seeking (KS) respectively, depending on their reading of the business environment.

Before going any deeper, it is necessary to take stock of what is meant by the business firm, and what its objectives are, and proceed to analyse the process and effects of this rapid globalisation. A business firm is a legal entity. Unlike a sole trader, or partnership, it is required to be incorporated with rules and objectives that are documented. It may be capitalised with borrowings or by shareholder contributions. While the shareholders own the enterprise and have claims to sharing the profits, it may be managed day-to-day by paid employees. The objective of the firm is ‘to maximise its value to its shareholders’ (Van Horne, 1974). Historically, ‘maximisation of profits is regarded as the proper objective of the firm, but it is not as inclusive a goal as that of maximising shareholder wealth’ (op. cit.). There are difficulties even in this conceptualization where ‘maximising market price per share’ is preferred by some to ‘maximisation of earnings per share’ (op. cit.).

A business firm currently in the news is Blacks Leisure, which was on the verge of bankruptcy, when the current adverse weather conditions improved its fortunes by providing a market for its thermal wear products. Now it is planning to expand further. Meanwhile the adverse economic environment has encouraged Poundland offering cheap goods to fill the gap left by Woolworth’s demise. The British salt manufacturing firm Ineos Enterprises chose to cancel a 12, 000 ton shipment of industrial salt promised to Germany, diverting the stock to local authorities in the UK in dire need of supplies to grit roads covered by snow. It is a good example of the environment influencing decision makers of private firms to act in a socially responsible manner. This upholds Van Horne’s (1974) assertion that even at the risk of not maximising shareholder wealth in the short term, management of business firms ought not to ignore the need for ‘social responsibility’ which brings long term benefits although perhaps not immediately apparent.

As related to business firms, social responsibility concerns such things as protecting the consumer, paying fair wages to employees, maintaining fair hiring practices, supporting education, and becoming actively involved in environmental issues like clean air and water… However, the criteria for social responsibility are not clearly defined, making formulation of a consistent objective function difficult’ (op. cit.).

It is now generally understood that a business does not, and cannot function in a vacuum. It has to react to events occurring outside its factory and office walls. The very first concern should be a close awareness of competitors’ strengths and weaknesses vis-a-vis its products and services. Additionally, most analysts require awareness of the environment in terms of political, social, economic and technological factors which impinge on the business firm.

Other analysts have expanded these to: Political – how changes in government policy could affect decision making in the firm. For example, the UK government’s concern over clean energy has resulted in a decision to invite foreign firms to bid for the supply of offshore windmills over the next several years. Not only do the windmill suppliers but also a host of firms required to supply ancillary products and services could take advantage of this decision. Social – how consumers beliefs and interests change over time. An example is the changing demography of many more senior citizens being present in the population and concerns over their health. Economic – how taxation, (e.g. tax holidays), interest rates, exchange rates, and the ‘credit crunch’ affect individual firms. Technological – how product innovations, and new technology like the proliferation of mobile phones, (iPads), change consumer preferences. Legal – how changes in law, enforcing of minimum wages, and regulating working hours, affect business. Last, but not least are the Ethical concerns that underpin social responsibility issues. An example is the refusal to trade with regimes known to contravene human rights legislation. All these factors influence to change markets which businesses need to take into account and respond to, if they are not to lose market share and jeopardise their long term viability.

A business firm, although incorporated by law as an entity is by no means monolithic. More than its shareholders, it has other stakeholders with different, if not competing objectives and interests within its ambit. Starting with the managers, there are other employees who may, or may not be trades union members, along with the community where it is situated, and which it serves, having to take into account local authority strictures on waste disposal and other similar regulations.

Discussing foreign direct investment (FDI) of transnational corporations, Robert Pearce defines the global business environment as ‘the environment in different sovereign countries, with factors exogenous to the home environment of the organization, influencing decision making in resource use and capabilities. This includes social, political, economic, regulatory, tax, cultural, legal and technological environments’. Pearce accepts that business firms do not have any direct control over this environment, but that their success depends on how well they adapt to this environment. As seen earlier in the case of Blacks Leisure and Poundland, a firm’s ‘ability to design and adjust its internal variables to take advantage of opportunities offered by the external environment, and its ability to control threats posed by the same environment determine its success’ (op. cit.).

Firms also take advantage of savings offered by outsourcing. Careful consideration of the variables of communication networks, cultural compatibility and reliability, needs to be addressed. There are offshore development centres which offer call centre provision and other web related customised professional services with appropriate infrastructure support.

How an American firm adapted to cultural diversity in France is discussed by Daniel Workman (2008). He says that the Euro Disneyland, a ‘transplanted American theme park’ near Paris had lost $34 million over the first six months since it opened in April 1992. Even before it opened there was strong local opposition that it threatened French cultural sensitivities. A strict employee dress code and the outlawing of wine in the park, among other things, angered the Parisians. Eisner, the CEO of the parent company in Florida commented: “What we have created in France is the biggest private investment in a foreign country by an American company ever. And it’s going to pay off”. Workman avers that ‘Eisner has since learned to recognize French cultural traditions and quality of life, rather than focus exclusively on American business interests, revenues and earnings at the expense of the underlying French culture'(op. cit.).

Disney found that the first American CEO of Euro Disneyland even with the capacity to speak fluent French, with a French wife, and a recipient of awards from the French government was still unable to make it a going concern. It was only after Disney replaced him and 23 American-born senior managers with local staff, that Euro Disneyland began to make profits.

Banning wine in a country which believes that ‘a meal without wine is like a day without sunshine’, made Euro Disneyland an unwelcome proposition even before it started. American-style hot dog carts were not attractive to a populace famed for its culinary and gastronomic sophistication. Later deciding to use French language rather than English, was also a more than reasonable accommodation made by Disney. It was one of the essential components of its later success.

Cultural encoding also requires that the Americans respect the more feminine French culture’s dominant need for a friendly atmosphere, cooperation, low stress levels and group decision-making instead of focusing exclusively on money and materialistic success (Workman, 2008).

Another aspect of business life is the support (or its absence) from the state as an unavoidable component of the business environment. Like most developed countries, Canada provides government funding to business firms seeking to expand into international markets. The government body responsible is the Small Business Finance Centre (SBFC). The funding is in the form of grants and loans which could be between $1500 and $10 million. Success stories abound. A $34,500 grant enabled a Winnipeg firm, K9 Storm Limited to export body armour for police dogs to 12 countries, in North America and Europe. Another Winnipeg company, Airport Technologies received $12, 500 to develop a snow plough called ‘Snow Mauler’ now being exported to the USA. The most successful has been the Garrison Guitar Works of St. John’s, Newfoundland, which received a grant of $250,000 to develop five guitar prototypes, and now, as a multi-million dollar company exports 20,000 guitars a year to 29 countries. They also own 350 retail stores in North America.

An interest free loan of $8700 enabled Keith Longmire (Nova Scotia) to develop his hand-painted birdhouses enterprise to establish itself in the US marketplace, while Domaine Pinnacle (Quebec) received a $300,000 loan to fund equipment to ferment high-quality apple cider and achieve sales of over $1 million a year. Meanwhile, Agribiotics of Cambridge, Ontario, was awarded a $44,570 loan to develop a vaccine to protect corn from pests and win a contract from the University of Wisconsin. The Canadian government also helps individual firms with their business plans as a precursor to obtaining a grant or loan (Workman, 2008).

In an earlier paragraph this essay introduced the idea of foreign direct investment (FDI). This stood at $14 billion in 1970 ‘but increased over 140 times to almost $2,000 billion by 2007. A large part of the upsurge in global FDI has been due to mergers and acquisitions (M&As). It is these cross-border mergers and acquisitions which have deepened the economic integration of developing Asia with the global economy. Researchers investigating the increasing M&A activity in this region decided that financial variables in terms of liquidity in the source country and the perception of risk (environment) influenced the level of cross-border transactions. They also conclude that the ongoing global financial crisis is likely to sharply curtail the extent of cross-border M&A transactions although this is not entirely proven.

Analysts hypothesised five ‘waves’ of M&A activity in the past. These waves occurred during periods of economic downturn. Currently, a ‘sixth wave’ is recognised with China, India and Brazil emerging as global players in trade and industry. One of the main reasons for M&A activity to be at its height in a recession could be the rapid drop in the stock value of target companies. A major factor in the increase in global outward foreign direct investment (FDI) stock increasing from $150 million in the early 1990s to $1200 million in 2000 may have been due to the above factor. However, it is not possible to generalise when one saw the attempts at a hostile takeover of the UK firm Cadburys by the US firm Krafts and its final, more amicable outcome. Cadburys was far from being a struggling firm. Its share price was holding up and its asset value had not in any way decreased before the takeover attempt.

A recent United Nations Conference on Trade and Industry (UNCTAD) report stated that 29 of the world’s largest economic giants are transnational corporations (TNCs). The annual value-added business performance of the 100 biggest TNCs exceeded that of some nation states. How the rise of TNCs transformed world trade over the last 30 years can be seen from the following statistics. In 1970 there were about 7000 non-financial TNCs investing directly in other developed or developing countries. By 1992 there were 37,000 with 170,000 foreign affiliates. The latter accounted for $11 trillion worth of output. Against this, the total world trade amounted to only $7 trillion.

An important variable in the success of transnational corporations, mergers and acquisitions is the facility with which managers, employees and customers with differing linguistic backgrounds communicate with each other. The total number of languages spoken around the world has been estimated at 6913. This is the reality of the language environment. However, there are two ways by which the language problem has been addressed. One can establish a common language for business, the most widely spoken international language being English. Although numerically more people in the world speak Chinese (Mandarin), it is confined to the People’s Republic of China whereas English is used in countries as far apart as New Zealand, Australia, South Africa, USA, Canada, UK and almost all Commonwealth countries.

Increasingly however, there are language intermediaries who could be engaged to conduct business in the local language. The volume of the global language service industry is estimated to be somewhere around $12 billion and handling around 500 million pages of translation and localization every year. An example of a language services provider of this type is Lionbridge with ’50 offices, $375 million revenue and about 4000 people on its payroll’. Specialised software products such as ‘recycling the translators’ knowledge-base (called translation memory)’ are among many new developments in the language translation industry (op. cit.).

Another reason for keeping up to date with changes in the environment is that a business firm’s operational effectiveness can be jeopardised by not paying heed to such changes. ‘Due to the rapid diffusion of best practice, a productivity barrier is soon reached… Japanese car firms… dominated in the 1970s and 1980s… Lack of a strategic perspective has since held them back while other Japanese businesses like Sony and Cannon flourish (because they) did not sit back with a ready formulated strategy that worked in the past, but revised their strategic thinking taking into account the changing realities of world trade. Obviously, their resource base and mix would have had to alter, and continue to change in the light of changing circumstances.

Writing about mergers and acquisitions Robert Heller contends that buying another business is the easiest task for management in most businesses. However, more things can go wrong in hasty acquisitions as has been proved in the literature. Here too, it is strategy and continuous scanning of the environment and competition which can ensure success. Heller talks of the need to achieve ‘superior organic growth’ once the merger has been accomplished. His answer to how this is to be achieved is to have a ‘visionary’ at the helm. Neither the conservative who wants to retain the status quo, nor the pragmatist who wants change but relies only on those tried and tested somewhere else, can succeed. Only the visionary, often battling against the odds, (could) drive the company into the future.

Heller explains why the Silicon Valley companies have enjoyed acquisition success far beyond the norm.The buys, have been slotted into a receptive culture, in which new ideas are the currency and visionaries dominate -led by a visionary chief executive who has delegated all operating duties to others.

The permeability of the firm to the increasingly global business environment has been demonstrated with examples, throughout this essay. Vision and strategic choice determine the ever changing nature of viable and successful enterprises. A final example below should convince even the most sceptical of the truth of the above conclusion.

United Technologies Corporation is America’s 20th largest manufacturer and the 43rd largest US Corporation according to Fortune 500 list (2006) with 215,000 employees. UTC makes Otis lifts, Carrier heating and air conditioning, Hamilton Sunstrand aerospace and industrial systems, Sikorsky helicopters, Pratt and Whitney jet engines, and Chubb security systems. UTC has thousands of branch offices throughout the world. Internet and IT is the key to UTC’s success. It is obvious that the UTC chief executive’s command over the organization’s resources around the world accounts for its superior productivity and competitive advantage. But it is equally clear that his control over resources is the result of well-thought out strategic decision-making of someone in close touch with the realities of business in the 21st century.


Denning, J. (1993) Multinational Enterprises and the Global Economy. Wokingham, Addison-Wesley.

Van Horne J.C. (1974) Financial Management and Policy. Prentice-Hall.

Workman, D. (2008) Disneyland Resort Paris Lessons; American Management Adapts to Cultural Diversity in France.quoted in ‘Boss is the King of Cool’ (The Sunday Times, 18th March 2009).

Commodities Research Reports – An Opportunity to Enhance Your Financial Front

The economy of a country depends on the strength of the market that it has within it. India is steadily and rising to become one of the leading economies of the world with a number of different markets which have exponential growth such as the agricultural, industrial, stock exchange real estate and commodity market. These different markets contribute to the significant progress of the economy of the nation.

Commodity trading, in particular is very prominent in the country; where two-thirds of the country depend on agricultural products. An important component of the financial market, the commodity market comprises of a number of products such as precious metals, base metals, energy, crude oil, soft commodities.

Besides the national commodity exchanges in India – similar to the NSE and the BSE there are a number of commodity exchanges such as the Multi-Commodity Exchange (MCX) at Mumbai, the National Commodity and Derivatives Exchange Ltd. (NCDEX) at Mumbai, the National Multi Commodity Exchange (NMCE) at Ahmedabad and the National Board of Trade (NBOT) at Indore. This commodity market functions through two different forms; Over the Counter (OTC) market and the Exchange based market.

In order to make a trading decision in this market it is important to research commodities and require a deep knowledge so as to find out and understand the latest news.

Research is one of the main and essential activities of trading commodities. Usually the main techniques used are fundamental analysis and technical analysis to research commodities or futures market.

There are many commodity research firms which publish commodity research reports either daily or weekly. By going through such reports you can gain a deeper understanding and a clearer vision as to know which commodities to trade in. They may also give you market opinions from a commodity analyst/trader who writes such reports. They provide information regarding the constant fluctuations of the prices; which is very often guided by demand and supply issues.

The Multi-Commodity Exchange (MCX) publishes MCX commodity reports (Commodity Specific Reports) which are specially prepared by the research team to create market awareness and facilitate any further business development. It provides a broad overview of the status of the commodities which are traded at the MCX; what is affecting their supply and demand dynamics or any other market moving factor.

These research reports for the different commodities can be downloaded online.

Commodity reports can be used by traders to maximise their profits and to gain an edge. They however do not assure you of profits but they provide important data to improve risk-adjusted returns.

Understanding Commercial Real Estate Leases

When you list a property to sell or to lease you need to understand the type of lease that you are dealing with. There are definite differences in leases at all levels and hence a lease must be read fully before proceeding.

Leases are the foundation of property performance. The best salespeople understand the leasing process and the high value that it brings to the future sale. A good lease can enhance a sale price when the time comes.

As mentioned, there are many different types of leases, but there are some rules and common basic elements which will allow you to understand the lease or the potential lease that you can apply to a property. It’s all about interpretation of the lease document and that means that you must read the document.

Professional Property Services

After many years of working in the industry, I have seen the best people set the foundations of success around the leasing process. This means that they have grounded themselves with investment skills and knowledge by leasing property for a few years. So let’s now look at how you can move down this path of skill development regards leasing.

The better you negotiate and the more fully that you interpret a lease, the more professional you are and you appear to the people that you work with or serve.

You can and should add strategic value in the client in every lease that you negotiate. A lease is not just a document to allow a tenant to occupy premises; it is a tactical cash flow that can attract to or detract from the property.

The way that leases work for the property investor will solidly impact on the property and its performance for the duration of the lease. As you work with tenants or buyers for the property, the type of lease that applies will also impact on the negotiations. Let’s look at the main lease types and expand on some of the most relevant issues for you.

Gross Lease:

Under a gross lease the tenant pays a full rent that includes a component for outgoings and the building owner will pay all building operating costs (also known as outgoings). This means that the lease itself will have rent review provisions that escalate the gross rent only.

In a lease of this type the landlord needs to know that they can maintain the building outgoings to predictable levels over the lease term as the landlord holds all the risk of paying the outgoings. The levels of rent review escalations in the lease must be expected to cover or exceed the escalations in the level of outgoings over future years otherwise the landlord will loose money.

Gross leases are common in retail and office property. Your choice in using this rent and lease type should be balanced against the predicted levels of outgoings costs and future changes for the subject property.

Obviously an older building will have steady escalations in outgoings above that of a building that is younger. As a building ages and deteriorates, the gross lease method becomes less attractive and more risky for the landlord.

Semi Gross Lease:

In this type of lease the landlord is initially setting a gross rent which is paid by the tenant and is reviewed over the term of the lease, however the landlord also gets paid some regular money for outgoings that increase under a specific calculation. This is how it is done:

The landlord specifically recovers the escalation in outgoings above a nominated outgoings base year. This base year is selected at the start of the lease and is usually the last reconciled outgoings year prior to lease commencement, which is usually the previous financial year to the start of the lease (because it is fully reconciled and known as a set value).

As the new semi gross lease proceeds through its term, the tenant has to pay the escalation of the outgoings above the nominated base year. For example, if in a lease the base year for outgoings purposes was set as the financial year 08/09 and the known level of outgoings for that year was $85m2 pa, then in the financial year 09/10 when the outgoings escalate to $97m2, the tenant will have to pay outgoings of $12m2pa. As the lease ages and in the financial year 12/13, the outgoings could be $108m2, and in that case the tenant will need to pay $23m2.

In this type of lease the base year is set and the outgoings ‘gap’ will likely increase significantly as the lease gets older. This type of lease is good for the landlord with younger properties, in that it protects the landlord against the escalation of the outgoings above the base year yet still allowing the landlord to use a gross rent as the foundation for rent charge and collection.

It is common in this type of lease for the base year of outgoings to be updated at the time of any market rent review during the lease. Market reviews in this type of lease would be undertaken if the lease was lengthy (over 3 years) and so the market rent review would occur say each 3 or 4 years.

It is not necessary to do a market rent review at any particular time in a lease as the matter is negotiable at lease commencement, however be aware of the fact of re-setting the base for outgoings and the impact it will have on the landlord.

As a further interpretation of this type of lease you should look at the type of outgoings that are recovered in the calculation. It is not unusual for ‘lease savvy tenants’ such as the government or large corporations to nominate the type of outgoings to which the base year escalations will apply.

Naturally it is better for the landlord to recover the escalation in all outgoings in a building above the base year, however the government and corporate tenants are well known for limiting the calculation to rates and taxes escalations.

Clearly a lease is a product of a negotiation, but you need to understand what can be done and then get the best lease deal possible for your client.

Net leases:

The term net lease is firstly generic; hence you should be aware that there are 3 types of net leases within the category. So let’s look at them.

Net lease: In this lease the tenant pays some or all of the rates and taxes for the property or premises.

Net-Net lease: In this lease the tenant pays the rates and taxes as nominated in the ‘net lease’ method but they then also pay for insurance premiums for the property and premises.

Net-Net-Net lease: In this lease the tenant will pay for the rates and taxes, the insurance of the premises, and they will then also pay for repair and maintenance costs associated with the premises.

So what lease type is the best for the landlord? In most cases the Net-Net-Net Lease is the way to go, however it is a matter of if the tenant will accept and sign that type of lease.

As a point of negotiation it would be wise in any Net Lease, or a Net-Net Lease to have a higher start rent for the landlord and better rent review provisions that offset the lesser outgoings recovery for the landlord.

Net-Net-Net leases are common on properties that are fully occupied by one tenant. This is method of lease structure is widespread in industrial property and office property.

Percentage lease:

This type of lease is more commonly seen in retail property as the calculation of rent is linked to the trading figures for the tenant. In most leases of this type the tenant firstly pays a fixed base rent that is geared to some rent review method, and then the tenant also pays additional rent that is calculated from their turnover or sales. As the tenant improves its trading, then the rent escalates.

An essential part of this lease structure is to obligate the tenant to give you accurate and regular audited turnover figures. The lease has to support and enforce the audit process for the landlord. Monthly turnover figures are the best way to go in this, with the tenant providing the audited figures to the landlord by say the 7th of the next month. The landlord then charges the turnover rent to the tenant based on the audited figures.

This type of lease is also seen in new shopping centres as new tenants stabilize levels of custom and sales, in supermarkets for the same reasons, and in hotels or motels. The basic strategy with turnover rent is to give the landlord some cash flow from the establishment of a base rent from the start of the lease, and then to collect additional rent as the property and the tenancy becomes more successful in generating sales and customers.

Spell it out

In all leases, the recovery of rent and outgoings must be clearly set out to avoid debate and disagreement with the tenant. As you can now see, the selection of the lease type that you are to use on a property will significantly impact on the future for the landlord. It will also impact on any sales situation.

It pays to know what is going on in the market regards lease and rent types so that you do lease deals that are similar to or better than the rest of the market. The right lease structure, document, and rent will help sell properties at better prices.

Eleven Development Laws to Consider Prior to Purchasing Your Development Property

1. Strategy and planning

Before venturing out to look for a ‘development site’ it is important to do some homework. As we have seen you first need to decide which real property development market you’d like to try your hand at. This is to ensure you start looking for the right type of sites. You need to know the style of development you’d like to try, the size of the land you need, and in most cases, the general location of your proposed purchase and most importantly which criteria will dictate market value. These things need to form the outline of your strategy and plan. If you don’t, you will make the process of land procurement difficult.

2. Location & area attributes – amenities

I am often asked how I find a great development site. The answer to this very general question lies within the area itself. Rather than go looking for a development site, then seeing if it will work for me, as mentioned above, I firstly determine the market I’d like to develop in, then the general area in which I want to develop.

People are usually ready to buy expensive property in preferred superior regions in both favourable and unfavourable times. The fact is that properties in first-rate suburbs continually fetch higher prices, while properties in second-class areas weaken in bad times. Building property in pricey areas is easier due to the better prospects of profits in these localities.

The rest is entirely a numbers game, but let’s get back to what we need to consider in selecting our area. There are a number of variables to consider. Most people are under the wrong impression a development site has different criteria for selection than those of an investment property. This is simply not true. Yes, it is true, there are many more criteria to investigate for development sites but keep in mind the purchaser is, in most cases, either an investor or a home owner and their criteria will be the same. Just as real property investors and home owners look for the right positioning and local amenities, capital growth and rental returns, you, the developer, should also have this end in mind and find sites that your end users will look to purchase. Therefore, taking into consideration the points we have just mentioned, when it comes to selecting a property to purchase ask yourself the following questions.

I call them the ‘5km’ questions.

• Is the train station within 5kms from here?

• Is the closest bus or tram stop 5kms from here?

• Is the local school 5kms from here?

• Is the local shopping centre within 5kms from here?

• Are there plans for any of the above in the near future within 5kms from here?

If you answered ‘yes’ to three or more of these then you have found a great location. If however, you answered ‘no’ to more than three, then it is time to move on and look for a different location.

3. How to assess a prospective real property site

It is appropriate to look out for changing suburbs when selecting your site for your development. For instance in poorly maintained suburbs, it is possible to frequently spot cases of youthful population migrating to these localities to purchase and refurbish the attractive older residences and rejuvenating the area.

Traders are usually attracted to these localities using uptown cafes, boutique shops and eateries to provide products to the newly settled. Closely examine property prices to note suburbs where you are convinced there are chances of undervaluation and are ready for change. Most of the time such properties neighbour an exclusive suburb where youthful buyers have been priced out.

4. Gaining profits during a purchase

Finding an ideal piece of land may take weeks or even a couple of months. A suitable way to make sure you get the ideal land that will offer the highest gains is to consider the sites price as a fraction of the ultimate value of your project at the time of selling. To achieve maximum profits from your real property, you should make sure the site or land value does not exceed 25% to 30% of the final project value. So if your property’s predicted end value is $1 million, your plot’s cost should not exceed $250,000 to $300,000.

You should always steer away from emotions and only buy property on the feasibility of developing it. The site should pass stringent qualifying tests which include location and planning provisions, suitability of the venture and the attractiveness of its location.

5. Local Council

You should always look for an area which has an active council. Activity in an area can be measured by the number of new dwellings, so drive around and look around. Open your eyes to see what is happening in the particular area you’re looking at. Can you see any new developments? Another way to ascertain if a Council is active is by going to the council web site and looking at how many applications for new dwellings have been submitted and, more importantly, how many have been approved or rejected. If you find a Council has a high refusal rate – say 50% – and most of the refusals are later overturned in VCAT, it usually means the council is against development and you may find it hard to obtain planning permits. It may be wiser to move onto another area or council. On the other hand, if you find over 70% of the applications were approved in council this would suggest the Council is pro-development and a planning permit will most likely be granted if it complies with all regulatory requirements. The council websites will also show you where in any local government area the council is approving those new developments. There might be plans for new infrastructure and amenities in the area to cater for the residential growth. The number of new dwelling approvals also tells you how much demand there is for new dwellings in the area. This is a good indicator of how much further growth and profit there is to be made there.

6. How to find information on local council area plans

All councils have a master plan and as a developer you need to find, understand and asses them. To find such a plan years ago before the IT age was quite difficult and would require you to sift through files at the local council offices. This was time-consuming but now with the benefit of the internet it is much more easily achieved. Nowadays the council web site will tell all you require to assess the plans for the local area. However, I would suggest you look more deeply into the information you find as council by-laws and planning regulations are in a state of constant change. Don’t hesitate to either phone or call into the council office to make sure what you find on their site still stands. Some councils update their web sites regularly and some do not. Recently I was caught out with a heritage listing on a property which was not mentioned in the local council web site. Most of the time however you should find all you need on their site.

7. What should you be looking for in the master plan?

The first thing to look for on a master plan is infrastructure and zoning changes. Look at where new railway stations will be built or where are new roads planned for. These things will give you an idea of where new dwellings will be. Look at where the industrial zones are; where the council is proposing to build a new shopping centre; if there a new school zoned or planned. Even look out for park land. This information will tell you where you should be looking for your new development site and where you should not. Remember, it is vital to check with the council about anything you are unsure about. A visit or a phone call can save you from losing thousands of dollars.

8. Streetscape – now we have chosen our area let’s find our street

When I talk about streetscape I am referring to the entire street and surrounding streets. Streetscape is very important in understanding the psychology of the current home owners or perhaps tenants, who will – if you purchase here – become your temporary neighbours and/or possible objectors to your project. Take time to study the streets.

Looking at the homes and the way the street is laid out will tell you if you will have a problem with ‘busybody’ neighbours, or if they will not even know you have applied for a permit. Probably one of the most significant checks that you will do will be on the people in this locality. When you do your study of the area and movements of the people who live there, make sure you carry this out over at least a few days, if not a week. Drive through the area at different times of the day, on different days, and preferably over a weekend, to see what is happening. Do the housewives get together to chat? Do people chat in the street? Perhaps there are Sunday barbeques which everyone enjoys. Are the homes well maintained, with manicured with lawns in top condition? Or is it the type of place where you would feel less safe? If it is the latter then it is most likely the area has a high number of tenants and it is highly likely the council and property owners will welcome change. If, however, there are regular Sunday barbeques, mother’s club meetings and yards that look neat and basically clean, then it is likely you will face objection to your project.

Next – look up! Yes, you read correctly – look up! Everyone tends to look down and around but not many people look up. Look up to see how the roof line of the houses forms the streetscape. Scan up and down the street – look at the roof lines of all the homes in a street and you will notice they will, in most suburban areas all have the same ‘line of sight’. This means that it runs in one straight line. Most people don’t realise that in most cases councils will base their decision on whether to allow double storey (DS) or single storey (SS) development on this line. This line will tell you if a double storey building will be out of character or whether it will fit beautifully into the existing neighbourhood’s character.

9. Preceding property

One of the most common mistakes made by first time developers is using the precedence theory. For Say there is another property in the street in which you hope to develop, that has been granted approval for a development which is the same in nature as what you are looking to build. This encourages you base your application along the same lines. But while it is always important to look at what others have done and then do as they have, it doesn’t always work that way.

What matters to you if what has to be done differently. You need to look at any conditions on a piece of property that has been subdivided. There might be conditions on the title such as a covenant. It may not even be possible to subdivide the land. You should also investigate the DDO (the Council Design Overlays) before you commit to subdivision. It may be different and have condition attached such as vegetation or other forms of overlay that could limit or even prevent subdivision. It is important to consider each property on its own carefully as it could be misleading to the eye.

10. Line of Sight

While the line of sight for a streetscape carries great weight with a council you need to be careful about the topography of the area. Let’s say we have a 500 metre street with a slope of 5 metres from one end to the other. At the bottom end of the street there is a three storey dwelling (9 metres high) and your proposed development site is at the other end of the street, on the high end. Because you want to build a similar building, you make a decision based on ‘precedence’ alone, i.e. there is one in the street already and you believe council will have to acknowledge this. This is WRONG!

Let’s look up first. By looking up at the line of sight from your site and then down the street, you will see the roof lines pretty much have an even flow, so as the street falls the properties become higher and as the street gains height the properties become lower. This means if you were to place a three level townhouse (9 metres) on your site it would be 5 metres higher than the one at the bottom end of the street and it would look very out of place.

The council, in most cases will override the precedence and reduce your dwelling by 5 metres to ensure the skyline remains consistent. This rule of thumb for Council keeps the height for each dwelling at a constant level throughout neighbourhoods.

11. Neighbourhood character

We touched on this before. We mentioned that street character is made up of a few things; neighbours, homes, roads, signage, trees – and all of these things will tell you how and what type of dwelling will be in keeping with the character of your street.

Old Edwardian homes with tree lined streets usually attract a home owner, not an investor, with an appreciation of the area who will, in 99% of cases, be very vocal against any new development proposal within the area. They want to retain its integrity. So, if you are thinking you will be able to erect an ultra-modern home in an Edwardian tree-lined street, think again. You might as well go and burn your money, as you will end up in VCAT with most, if not all, of the neighbours and the Council against you.

Remember, the street’s character not only shows you what type of home you will need to build there but also what type of people you will be dealing with. If, for example, you have a street where there are broken down cars and scrap metal in the neighbours’ driveways and on their lawns, and if the homes are not well maintained, it is highly likely it is an area with a high rental component, and it is unlikely you will get many objections from your neighbours. You’ll find these homes are most likely owned by investors who will welcome the new proposal as a positive for the area in both clean-up value and monetary value.

This view will also be taken by the Council. The likelihood of new dwellings in a low income area increasing the prices for rent is inevitable and eventually the quality of the tenants and the homes will improve. This is probably, from an investment and development point of view, a great place to purchase property, develop and hold until the rest of the area catches up. I have seen property in areas like this double in price very quickly once developers start construction. On the down side though, it may take many years for this to happen.