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Exchange rate volatility

The exchange rate can be defined as the currency of a given country expressed in terms of another countrys currency. The changes in the exchange rate affect the profits made by international trading partners and multinational corporations. The exchange rate also affects the value of investments as held by a given individual. The relative rate at which the exchange rate or the prices of securities change is referred to as exchange rate volatility. The volatility is high when the prices change faster and low when the prices change slowly over a selected period. Exchange rate volatility affects the price stability, the profitability of a given organization and the financial stability of a given country. There are many factors that affect the volatility of the exchange rate. These exchange rates are mostly expressed in terms of models which define exchange rate as being a function of set macroeconomic conditions. These factors are subject to a lot of research and finding the exact determinants of volatility are subject to numerous researches and debate (Bergsten and Williamson, 2003). These macroeconomic conditions encompass prices, government policies, government debt, productivity differentials and foreign assets. Most of the models in the past have indicated that exchange rate volatility is mostly affected by the movement in the macroeconomic environment as well as other factors (Claudio, 2007). Some of the main factors that control the movement of exchange rate are:

• Inflation differentials.
• Interest rate differentials.
• Public debt.
• Current account deficits.
• The economic and political climate of a given country.
• Import /export rations or balance of payments.
• Speculation.
• Competitiveness.

Inflation differentials

The inflation levels of a country affect the exchange rate movements. From literature, it has been observed that countries with minimal inflation rates have their currency values rising over time as their purchasing power increases as compared to other currencies. For example, if the rate of inflation in Saudi Arabia is lower as compared to other countries, it will become more competitive and this will increase the demand for their currency. Naturally, countries that have low inflation rates experience a general increase in the value of their currency as compared to countries with high inflation rates. Some countries with low inflation rates include Japan, Germany, Switzerland, the US and Canada. On the other hand, nations that have very high inflation rates tend to experience depreciating current prices and high-interest rates.

Interest rate differentials

Research has shown that interest rates, inflation and the exchange rate are correlated to each other. By controlling the interest rate, the exchange rate can be manipulated. The central bank controls the interest rates. When the central bank raises the interest rate, the country is able to attract foreign investors and the availability of capital and this results in to increase in the exchange rate. Thus, the central bank can control the exchanges rate by raising the interest rate. However, this only works if the impact of the high-interest rate is not mitigated by an increase in the inflation rate which would definitely drive the exchange rate downwards. Conversely, the exchange rates tend to decrease as the interest rate reduces.

Public debt

Public debt results when a country borrows money for the purpose of economic development and public sector projects such as infrastructural development. These projects stimulate the local economy but on the other hand, result in high inflation rates as the debt must be paid through taxes. High inflation results in a reduction in foreign investments and this ultimately drive the exchange rate downwards. When the debt is too high, the government may print money but this will also drive inflation much higher. The government may also sell bonds and other securities but foreigners may opt not to buy these securities because there is an impending risk if the country defaults to pay the loan.

Current account deficit

The current account deficit represents the balance of trade between a nation and its trading partners. It shows all the payments of a countries goods, services, interests and dividends. The current account deficit occurs when a country spends more on imports than exports. This means that the country must borrow from its foreign investors so as to make up for the resulting deficit. The demand for foreign currency lowers the country exchange rate to a level where the countries products are cheap enough to enable the foreigners to buy more so that the deficit is balanced. The current account deficit also results in the lowering of the exchange rate and this makes foreign products more expensive consequently discouraging importation but promoting the domestic market.

Economic and political climate of a given country

Most foreign investors look for countries with strong economic and stable political systems. This means that a country with good economic performance will attract foreign investors and this will subsequently result in a high exchange rate. Also, countries with a stable political system tend to attract foreign investors and this results in to increase in the exchange rate. Conversely, a deteriorating political and economic system attracts less foreign investments and this ultimately results in a reduction in foreign investments.

Balance of payment

When a country has high imports as compared to exports, a deficit on the current account occurs. The current account deficit is balanced by a surplus in the capital or financial accounts or it can be sourced from foreign sources. If it is financed from capital accounts then this affects the exchange rate. When a countries export market increases, favorable terms of trade result and this increases the exchange rate. When a country has less revenue from exports as compared to the amount spent on imports, unfavorable terms of trade exist and this results in a reduction in the exchange rate and fewer trading partners.

Strength of other currencies

The relative strength of other currencies affects the exchange rate movement. A typical scenario is the Japanese Yen and the Swiss franc whose value rose in 2010 and 2012 because the investors worry that the currencies of the European Union and the United States were fluctuating. It can be seen that, even though there was a low-interest rate and growth rate in Japan, the yen appreciated. This is because it was more stable as compared to the strengths of the other currencies.

Competitiveness

Shifts in the competitiveness of products in a given country also affect the volatility of the exchange rate. When products from a given country become competitive, the exchange rate rises as more products are exported. This would definitely result to a favorable balance of payment if the country imports less. Conversely, reduced competitiveness of a countrys product reduces the exchange rate. For example, in the year 2007 to 2009, the sterling pound value fell due to reduced competitiveness, the large UK current account deficit, and the recessions that hit the economy. The UK banks intervention was to increase the money supply and this raised speculation of future inflation and subsequently, the UK bonds became unattractive.

Speculative tendencies

Speculation has been shown to cause movement in the exchange rate. If speculators believe that the dollar price will increase, they tend to demand more of the currency and this will definitely drive prices upwards. If speculators believe that a given currency will fall, then, they tend to demand less and its exchange rate falls (Economics help, 2012).

Models Used to Study the Exchange Rate Movement

Forecasting of the exchange rate is done through the development of economic models which study and show the movement of the exchange rate as a function of several independent variables. Various models have been put forward in order to study the movement of the exchange rate. The convectional empirical literature classifies the different exchange theories into different classes. One of the groups of the classification of these models into three different types are the partial equilibriums model, the general equilibrium model and the disequilibrium model. In this classification the first group is the partial equilibrium models which encompass:

• Relative PPP and the absolute PPP: these two take into account the goods in the market.
• Covered Interest Rate Parity (CIRP) and Uncovered Interest Rate Parity: these two consider the assets in the market.
• The external equilibrium model: the balance of payment affects the exchange rate.

The General rate equilibrium model has the following models:

• Mundell- fleming model: This model takes into account the micro-economic aspects, money markets and goods market as well as balance of payments.
• Balassa-Samuelson model: this model maximizes the profits that a firm gets.
• Redux model: Pricing to the market: this model is created so as to emphasize the maximization of the consumer utility.
• Simple monetary model.
• Dornbusch model: this combines the monetary equilibrium with adjustments in price and output so as to achieve the equilibrium.

The third group is the hybrid models which are a combination of both the two models.

Purchasing Power Parity (PPP)

This is a model that allows the determination of the currency value by estimating the number of adjustments required so as to make exchange be equivalent to the purchasing power of the currency (Genberg, 1978). The PPP model is developed such that the price of a given product is the same in two different countries. PPP is a ratio that indicates the comparative prices differs across two countries for a given product or group of products (Nguyen, 2005). In this model, if $ P_X is the price of a commodity x in a country like the USA and the price of the same commodity in UK is P_X , the law of one prices means

(1)

Where, E is the exchange rate between the sterling pound and the dollar. If the prices were expressed in terms of the consumer price index (CPI), the relative prices can be compared as follows

(2)

Where E ¬/S is the exchange rate between the Euro and the Dollar. If this equation is true, then the equation for absolute PPP becomes:

(3)

This equation can be written as

(4)

The left side of the equation 4 represent the real exchange rate that has been adjusted based on the pricing levels. For the absolute PPP to hold very strict definition of the goods must be given but this is not possible as the prices of goods vary with composition and weight. Also, the cost of transportation, insurance, taxes and tariffs, warehousing present some difficulties when using the absolute PPP.

Relative PPP

This offers an alternative to the absolute PPP. Relative PPP takes into account the fluctuating price levels and changes in the exchange rate. The main influence to the relative exchange rate is inflation which has a direct impact on the exchange rate levels. The relative PPP is mathematically expressed as

(5)

Where ² is the current inflation rate while ¹ is the previous inflation rate. Thus the relative PPP change is dependent on changes in the inflation. Thus it can be seen that the exchange rate in this model depends on the prices of commodities and the inflation rate.

Covered interest rate parity (CIRP)

The interest rate parity theory is used to analyze the relationship between spot rate and the future rate of a given currency. According to CIRP, the different interest rates of two nations are balanced by the exchange rate forward premiums. This means that the spot or forward currency premiums are used to offset the differentials within two countries.

For example, if China is the home country and the foreign currency is the USA. Suppose the nominal interest rate at a time t in China is i_t while the same rate is i_t^*. Further, the spot exchange rate is S_t while the forward exchanges rate at t+1 is S_t+1. Suppose the investor makes a deposit of 1 Yuan in china, he will get a return of i_t after a time equal to t+1 and hence the total including the principle is 1+i_t. Suppose the investor exchanges the Yuan for a dollar which has an interest rate of i_t^* then the sum of the principal and the interest can be given by (1+i_t^*)/S_t. Because the forward change rate is S_t+1 the principle in term of Yuan is (1+i_t^*)S_t+1/S_t. . In a competitive market, it is expected that the return of depositing the Chinese yuan should be equal to the return for depositing the dollar. This is expressed as

(6)

This can also be expressed as

(7)

Mundell Fleming method

The Mundell Fleming method is developed as an extension of the ISLM model. In turn, the IS-LM model considers the market of goods, money and assets. The model can be used to study the monetary and fiscal policy. These two policies impact on the exchange rate. The link between goods and the money market can be described using the IS-LM model. In the Mundell  Fleming model, another component that is considered is the balance of payment. In total the Mundell Fleming considers the money market, the goods market and the international payments.

By definition the goods market equilibrium is expressed as an IS curve

(8)

Where:

• Y is the domestic national income.
• C=C(Y) is the consumption. Further, consumption is affected by income and is hence a function of it.
• G-is the spending by the government.
• X=X(Y*q) represents the exports which depends on the foreign national income and the real exchange rate.
• M=M(Y, q) represents the imports which is a function of the domestic income and a decreasing of the real exchange rate.

The money market equilibrium is determined using the LM curve. It is assumed that

The money market equilibrium can be expressed as:

The external equilibrium can therefore be expressed as shown in the equation below:

BP=CA+KA=0 where CA is the current account and KA is the capital account CA=PX-SP * M

And KA=K (i-i*-”Ss)

The mundell-flemming method assumes that a state of perfect capital mobility, fixed exchange rate and monetary policy independence cannot be achieved at the same time.

Exchange rate and productivity  the Balassa  Samuelson model

The PPP and the CIRP models only express partial equilibriums. The two models dont relate the behaviors of the producer and the consumer. It can howver be argued that the price in a perfect market is determined by the forces of supply and demand. It is therefore necessary to determine the behavior of the consumer and the producer during the determination of the exchange rate. However, these are associated with the microeconomic aspects of a business Balassa, 1964; Samuelson, 1964). Using this model, the production function of tradable and non tradable goods can be represented by:

• 

  ;

• 

  ;

• 

  ;

• 

Where Y is the production, A represent technology and L represent labor, N represent non tradable sector, T represents tradable sector. The foreign market has the same representation but differs and is represented by the same parameters with a *. The model assumes that one price hold for different commodities and the labor mobility is zero. The price index can be calculated using:

Where Ò represents the amount of tradable goods in the output. To determine the price at given country as compared to those of the trading partner, the following equation is used.

The GDP per every employee is given by

The relative prices can then be given as

In this model, the relative prices are affected by the GDP and the productivity level of the two economies. The exchange rate increase when the home country has a high GDP growth rate. Also, an increase in productivity of non tradable in the home country as compared to the foreign country will result to a reduction in the real exchange rate (Obstfeld & Kenneth, 2000). The current model can be improved so as to factor in labor and capital. The resulting equation is shown below:

• 

  ,

• 

Where K represents the capital.

Based on the B-S model indicates that there will be growth if the productivity growth of the tradable exceed the productivity of the non- tradable. The model indicates that countries with high productivity in the tradable as compared to the non tradable will attain high price levels. This is because the high productivity gains allow the wages to rise and because the wages relate the tradable and non tradable sectors, it is expected that the economy will attain a given price level. The model has some shortcoming such as the assumption that the price of products at home is the same as those abroad, also the method of determining the prices still remain unknown since the model does not incorporate demand and lastly the model does no how the market prices are determined because it does not factor the demand and consumer behavior. The model does also not include the role of money (Rogoff, 2003). In conclusion the model partly determines the real exchange rate value.

Dornbusch Overshooting Model

A lot of literature show that the law of one price correlates with the normal exchange rate (Giovannini, 1988). It has been shown that the real exchange rate change less when the nominal exchange rates are fixed (Mussa, 1986). This necessities the extension of the exchange rate monetary model (Dornbusch, 1976 and Rogoff, 2002)

Under the dornbusch model, the uncovered interest rate parity and the monetary model are retained. Sticky prices are used as instead of having varying prices. The first condition of the of this model is the money equilibrium which is represented as:

Where M is the monetary supply, P is the domestic price level, ³ is the domestic output, · and Æ are the positive parameters. In this model, it can be seen that the opportunity costs of holding the money increase with high interest rates. Subsequently, the demand for money reduces. Also the price levels affect money demand. The second condition is the uncovered interest rate parity which is expressed as:

Where e is the logarithm of the exchange rate #5 denotes the market expectation at a time:

With regard to the uncovered interest rate parity, the interest rate at home must be equal to the foreign. The Dornbusch model assumes that the prices are sticky and cannot be adjusted immediately.

Capital budgeting in corporations

One of the most imperative decision made by a manager is capital budgeting. To maximize on the wealth of shareholders, a manager must evaluate all the projects and investment opportunities so as to select the best. There has been an observation that most of the methods selected and used are not in line with the academician point of view. According to studies done by Ryan (2002), the methods different managers use during capital budgeting differ and are not consistent with what is taught by the academicians. Capital budgeting decisions for the fortune 1000 companies is done through the use of method such as the Net Present Value (NPV), the Internal Rate of Return (IRR) and the payback method. A study was done to determine the most preferred method of capital budgeting in the fortune 1000 companies (Ryan, 2002).

According to research done by Miller (1960), Schall, Sundam and Geijsbeek (1978) and Pike (1996), the most preferred method of capital budgeting was the payback method while the internal rate of return was shown as the most preferred by some researcher. Interestingly, these studies show that the NPV is the least preferred method as compared to the others. One common observation is that these studies were done before computer and information technology became more sophisticated. Klammer (1972), on the other hand, shows that the internal rate of return is the most preferred method. In the past, most of the researchers who analyzed the usage of the different capital budgeting techniques found out that the least preferred method of capital budgeting was the profitability index. These researches were done between 1970 and 1983. Also, studies were done by Jog and Srivastava (1995) and Pike (1996) show that there has been a reduction in the use of the internal rate of return in the United Kingdom and Canada. In all the research done, NPV trails among all the other methods. In the past, managers have considered that the use of IRR is a better method as compared to NPV. Managers view IRR as more efficient when it comes to comparison as compared to the NPV (Evans and Forbes, 1993). The current research however shows that managers are moving towards NPV as their preferred choice. This presents contradictions as past managers preferred IRR to NPV. However, the academicians believe that NPV is superior as compared to the IRR method.

It has been observed that for mutually exclusive projects, the NPV method assumes that all the cash flows got are invested at the cost of capital. On the other hand, IRR assumes that all the intermediate cash flows are put back to the business at the IRR rate, which is higher than the capital cost (Ryan, 2002). NPV method is also not sensitive to the multiple changes in the cash flows (Ryan, 2002).

Net present value method (NPV)

The NPV or the Net Present Worth compares the money at the current day with money in the future. It shows the relation of money today with the same amount tomorrow. The net cash inflows and the net cash outflows are compared. It compares the present value of money today with the value of money in the future. The present value represents the amount of money that should be put in alternate investment so as to obtain an expected amount after some years. The method also takes into account the value of money in the future. The method is used in capital budgeting and to make other economic, financial and accounting decisions.The general formula for the NPV method is:

Where:

• PV is the present value.
• C₁: is the cash flow at the beginning.
• R: is the discount rate.

Internal Rate of Return

This is a capital budgeting method where the net present values of all cash flows of a given project are made equal to zero. It is one of the discounted flow technique used in capital budgeting method. The IRR is the interest rate at which the NPV of all the positive and negative cash flows is equal to zero. It is used to measure and compare different alternatives that a company has and to determine the most profitable venture in which the company can adapt. The project with the highest IRR is considered as the best for the company to invest in. it is also referred to as the economic rate of return.

The formula for IRR is

Payback method

The payback period can be defined as the period of time that a project or an investment takes so as to return the money that the company invested in the project. When a company invests in a given project, they pay a significant amount of money as capital. After completion of the project or an investment, it is expected to generate money, that is, the cash inflows. If the annual cash inflows are high, then the project will recover the initial cost much faster. However, if the initial costs are lower, then the project will recover the initial cost much slower. The time taken to recover the initial cost is the payback time. Projects with a small payback period are more favorable than those with a high payback period. The payback period can be computed using:

Payback period =Amount invested /annual cash inflows

Even though the payback method is a simple method of determining the attractiveness of a given project, it does not factor into consideration the time value of money. This is a principal disadvantage of the method. Other than the time value of money, the payback method does not take into consideration other factors such as the excepted project life and it only measures the time required to recover the original amount.

In conclusion, there are various capital budgeting methods used by various multinational corporations. In the past, the managers relied on the use of IRR and the NPV, however, the IRR method was highly recommended as compared to the use of NPV. According to the research that was done by Ryan (2002) on the preferred capital budgeting method, it was shown that the NPV method was the most preferred method as opposed to the IRR method. Both the IRR and NPV were ranked higher as compared to all other methods.

References

Balassa, B 1964, The Purchasing Power Parity Doctrine: A Reappraisal, Journal of Political Economy, vol. 72 no.1, pp. 584-596.

Bergsten, C and Williamson, J 2003, Dollar Adjustment: How Far? Against What?, Institute for International Economics, Washington.

Claudio, M 2007, On the macroeconomic causes of exchange rates volatility International Centre for Economic Research, Torino.

Dornbusch, R 1976, Expectations and Exchange Rate Dynamics, Journal of Political Economy, vol. 84, pp. 116176.

Evans, D and Forbes, S 1993, Decision Making and Display Methods: The Case of Prescription and Practice in Capital Budgeting, The Engineering Economist, vol. 39 no. 1, pp. 87-92.

Economics help 2012, Main Factors that Influence Exchange Rates. Web.

Genberg, H 1978, Purchasing Power Parity under Fixed and Flexible Exchange Rate, Journal of International Economics, vol. 8, pp. 24776.

Giovannini, 1988, Exchange Rates and Traded Goods Prices, Journal of International Economics, vol.24 no.1, pp. 4568.

Jog, V and Ashwani, K 1995, Capital Budgeting Practices in Corporate Canada, Financial Practice and Education, vol.5 no. 2, pp. 37-43.

Klammer, T 1972, Empirical Evidence of the Adoption of Sophisticated Capital Budgeting Techniques, The Journal of Business, vol.45 no. 3, pp. 387-397.

Miller, J H

Abstract

In the present day rapidly changing market environments, it has become critically important for investors to take a deliberate approach for capturing opportunities to enhance returns and at the same time to manage their portfolio volatility efficiently. While prudent investing calls for taking calculated risks a disciplined asset allocation aids the process. Alternative investments have increasingly been looked at as one of the effective ways to reduce portfolio volatility. Alternative investments of late have come to mean every investment category other than long-only  publicly traded stocks and bonds, real estate, venture capital, private equity, natural resources, commodities, distressed debt, private fixed income, absolute return strategies, event-driven strategies  and any other asset hedged or levered. Of these assets, real estate has been considered a hard asset and has been preferred as an attractive alternative asset till the subprime crisis started. The objective of this paper is to analyze the reasons why alternative investments have become a significant segment in the asset allocation strategies of investment and fund managers. The paper also presents a detailed review of the impact of the subprime crisis on the asset allocation of alternative investments.

Introduction

The financial market crisis that erupted in August 2007 has developed into the largest financial shock since the Great Depression, inflicting heavy damage on markets and institutions at the core of the financial system.

International Monetary Fund, World Economic Outlook, 2008.

[George Soros] noted, the financial crisis is beginning to have serious effects on the real economy, adding: The extent of that is not, in my opinion, yet fully recognized.

Reuters (New York), 2008.

It has been observed during the recent past, that the globally prevalent investment scenario necessarily called for an asset allocation that invariably includes various alternative assets. From an efficient investment perspective, this has made a modern investment portfolio unthinkable without alternative investments as they have encompassed a wide range of assets as attractive investment products. The importance of these assets has increasingly been felt as this asset class has the capability of diversifying a portfolio with their inherent character of not getting linked to the performance of the traditional class of assets. For instance, in the case of hedge funds and private equity funds, it has been often the case that the investments are limited to a few qualified investors representing individuals with a particular level of income or net worth. However depending on ones own net worth, liquidity needs, and risk tolerance the investor would like to consider diversifying his/her portfolio with suitable alternative investments. However, it needs to be considered that this scenario has evolved during the past decade only as there was the generation of various classes of investment vehicles to enhance investment variety during this period only. The objective of this study is to analyze how the alternative investment segment became one of the important and powerful elements in asset allocation. The study also explores the impact of the subprime crisis on alternative investments.

Asset Allocation  an Overview

For quite some time traditional asset classes like stocks, bonds and cash or cash equivalents were the main class of assets on which the investors focused their attention. Out of these traditional classes of assets investments in equity have been regarded as most aggressive and the investments in equities were able to provide attractive returns to the investors in the form of dividends as well as capital appreciation. Bonds as against the stocks though provided lower returns were having lower volatility. Cash in dollars as deposits or other forms of cash equivalent investments produced still lower returns. With the expansion of the economies and increase in the disposable surplus of the individuals and corporations there emerged the necessity to find alternative investments for increasing the returns and at the same time to invest with reduced risks.

With the evolution of new and innovative investment vehicles, it was made possible to change the investment portfolio with the overall objective of increasing the return and reducing the risks.

This has made the investors choose among all available alternatives that led to the development of the concept of asset allocation. Asset allocation is the process of distributing investment capital across various classes of assets. In this, the distinct possibility of the different asset classes behaving differently at various points of time needs to be taken into account. Through adopting the process of asset allocation the investors would be able to diversify their portfolios and reduce their dependence on the performance of individual investments. The objective of the process of asset allocation is not only to protect the downside of the investments but also to reduce the volatility of the investments and thereby to increase the compounded return.

Asset allocation has been considered as a wise strategy all along for efficiently monitoring the investments. During recent periods this has become even more essential amidst a growing array of international and domestic investment options which has made the process of constructing the portfolio more complex. At the same time expanding choices of investments opportunities offer potential ways to optimize the returns. With a better and proper understanding of asset allocation, it is possible to enhance the efficiency of risk management so that the investment goals can be achieved with maximum effectiveness. With this background, this study through an exploratory approach analyzes the significance of alternative investments in the asset allocation process. A descriptive note on the impact of the recently occurred subprime crisis on alternative investments is also presented as a part of the paper.

Aims and Objectives

The broad aim of the study is to examine the role and significance of alternative investments in the asset allocation process and the impact of the recent subprime crisis on the efficiency and adaptability of the alternative investment asset classes. Through exploratory research, while finding plausible answers for the main research questions the study also extends to present a full picture of the alternative investments examining the history to arrive at the current significance in the asset allocation. This is done with a view to providing a wider view of the diversity of alternative investments. The other objectives of the study include the analysis of issues relating to the subprime crisis including the consequences of the crisis with respect to hedge funds and other financial service products and services that resulted in the most serious financial crisis of the century.

The rationale behind the Study

With the present-day economic meltdown can easily be traced back to the aftermath of the subprime crisis which rocked not only the US economy but many of the world economies during the second half of 2007. While there is every attempt to regain control over the economic conditions, it is necessary that detailed knowledge is acquired on the development of the situations that led to the present-day economic crisis. From that perspective, the objective of this study in analyzing the asset allocation and alternative investment strategies and the impact of the subprime crisis on the alternative investments would bring out the root causes of the worst economic crisis after the Great Depression. This study is expected to provide the reader with descriptive knowledge on alternative investments and the impact of the subprime crisis on them.

To ensure a comprehensive presentation this presentation is structured to have different chapters with the first chapter providing an overview of the topic along with the aims and objectives of the study. The second chapter is devoted to presenting a detailed review of the available literature to enable the readers to get an in-depth understanding of the topic under study. In chapter three the methods adopted to conduct the study are described with the fourth chapter dealing with the findings and analysis of the study. Chapter five concludes the paper with a few remarks as a recap of the issues dealt with by the text and a few recommendations for further research on the subject. This chapter also details the limitations faced by this study.

Literature Review

The objective of this chapter is to provide a detailed review of the available literature in published documents, papers, presentations in professional journals contained in print and electronic media. Since there is an abundance of literature available on the topic this paper strived to present the most relevant information without sacrificing the focus on different viewpoints.

The term alternative investments would convey a different meaning for those people outside the financial investment community. It might be so that even within the financial investor groups not all of them would be aware of these new vehicles of investment that is available in the hands of the funds managers and investment managers. With the rapid increase in the number of investment opportunities and vehicles available a number of investors including high net worth individuals have started realizing the significance of the alternative investments and their ability in compounding the returns at reduced risk levels. With the advancement in information technology, the information gap gets narrowed down and this leads to enhancement in the level of investor sophistication. As a consequence, there is more number alternative investment opportunities develop. It has been observed that during the last five years alternative assets class has been found to be the fastest-growing asset class with five to seven percent of allocation going towards this class of assets. In the case of endowments and funds, this percentage is found to be more with the percentage allocation reaching 20 at times.

Asset Allocation and Alternative Investments

It is interesting to note that institutional investors have been increasingly exposed to issues relating to Liability Driven Investment, Alpha Transportation and the role of alternative investment in the asset allocation. (Pierre Sequier, 2006) These topics have come to the fore due to the changing institutional landscape in the recent past. The reason for the exposure of the institutions to these newer ideas can be traced primarily due to two reasons.

1. The combination of lower interest rates and below-average equity performance that prevailed at the start of this century has created a number of bona fide funding issues for a large number of pension funds. This was the result of the mismatch between the risk exposure of the liabilities of these funds and their relative assets. This has also caused a number of countries to alter their regulatory positions with respect to the valuation of liabilities which ultimately had an impact on the investment and asset portfolio of these funds relative to their liabilities. In order to integrate into this new regulatory regime, the pension assets had to be deconstructed into a hedging portfolio. This separation of assets is the root cause for the development of the concepts of liability-driven investments. Performance enhancement objectives of these investment requirements led to alpha transportation techniques and an enhanced role of the alternative investments.
2. Another change that occurred during this period is the significant development of alternative investments. The rapid growth of the private equity sector and the hedging fund industry has opened up a number of performance sources that is available to investors to choose from. The strong development in these sectors coupled with lower rates of interest and poor performance of the equity market led to a considerable increase in demand for alternative investment strategies. (Pierre Sequier, 2006)

It has been found that the asset allocation framework has to necessarily adapt to this new context. It has also been observed that the traditional way of separating the strategic asset allocation to manage the beta from the tactical asset allocation (this method uses the concept of generating alpha within an asset class) was found to be ineffective to handle the new investment opportunities which are spread over various asset class. In addition, the traditional basis cannot address the strategic role of alternative investments within an institutional portfolio. It is important that alternative investments are to be used only as opportunistic positions as they do not offer any exposure to traditional betas. (Pierre Sequier, 2006)

Alternative Investments

Alternative investments in general are those investments that are a departure from the traditional form of investments. A traditional investment, on the other hand, can be defined to include an investment strategy or asset class that is mainstream and in most cases, the asset is traded in major exchanges of the world. Examples of traditional assets include domestic large-cap stocks, small-cap stocks or bonds. It may be remembered that sometimes back Real Estate Investment Trusts (REITS) and international bonds and equities were considered as alternative investments. However, with the advent of globalization and increased use of the internet, there has been tremendous improvement in investor sophistication. This improvement in sophistication has enabled the investors to invest more in early forms of alternative investments like REITs. As such the early class of alternative investments has become mainstream investments in due course of time. With the new class of assets gaining recognition from a large number of investors, and more research has been made available, more and more new investors have started looking for alternative investments to make extra earnings. Another impact of the increase in the number of investors was the decline in the profits for large fund managers to some extent which made them look for more profitable alternative investment avenues. With every new find of such investment strategies, they get added to alternative investments.

Objectives of Alternative Investments

Generally the alternative investments are resorted to by the investors with threefold objectives. They are: (i) to attempt to diversify an investment portfolio by engaging innovative investment strategies, (ii) to aim for higher than normal returns that they can expect from other forms of investments and (iii) to reduce the volatility and risk in the investment portfolio through low or negative correlation of returns with the traditional asset class or by correlating returns within inflation. One major source of attraction that may be associated with alternative investments is the complexity in their nature which makes it difficult to be analyzed thoroughly. This results in market inefficiencies which are exploited by firms having the mindset and willingness to employ time and efforts to undertake the required research to bring out a financial asset that is acceptable as an alternative investment. Diversification thus is the primary benefit that the alternative investments extend to the investors in comparison with the traditional class of assets. It has been found that many of the alternative investment strategies are embedded with extremely low correlation to the price movements in the more traditional forms of financial securities. Under circumstances when the financial markets remain overvalued, from the overall risk perspective, maintaining a portfolio the returns which are independent of the financial market can really be enticing. While there are abundant opportunities available for making higher returns with alternative investments, such investments are looked at favorably even from the angle of risk control and diversification.

Forms of Alternative Investments

Although newer investment strategies and products are developed and introduced in the market every now and then the following are some of the common types of alternative investments recognized by the financial investment community. Even though these investment strategies are generally classified as alternative investments, each one of them possesses unique characteristic features.

Hedge Funds

Hedge funds cannot be defined as a particular alternative investment strategy since the funds constitute different investment vehicles that are employed by many types of non-traditional investing strategies. Hedge funds have the flexibility to invest in any asset class they wish. The hedge funds are limited by their own creativity and the willingness of the investors to part with their money with the confidence placed on the funds. Hedge funds are usually structured as limited partnership interests and the hedging funds sell these interests to qualified investors. Therefore these funds enjoy only limited flexibility. They remain largely unregulated which is quite contrasting to the operations of mutual funds. (IIM Calcutta)

Private Equity

This investment strategy involves a kind of equity investment in non-public companies. Although this alternative investment is practiced in many different ways, buyouts and venture capital are the most important forms of investment adopted by this strategy. Buyouts take place when the investors indulge in purchasing all or a part of a firm exclusively with the intention of reselling in the future with a profit margin. Leveraged Buyout (LBO) is one of the important variants of this investment strategy where the debt to equity is very low and the success of such deals is largely dependent on the capabilities of the management team to create value for the firms. Venture capital is another large variant of this alternative investment strategy which involves investing in the companies that are in the start-up or early stages but with a high potential for growth. (IIM Calcutta)

Other Types of Alternative Investments

There are other types of alternative investments like commodities, direct real estate, arbitrage strategies, market neutral, managed futures, global macro, distressed securities, fund of funds and the like with each one of them having its own characteristics in terms of associated risks and returns. (IIM Calcutta)

Causes of Financial Crisis

Recent crisis in the financial sector in the United States as well as in other parts of the world including Europe clearly prompts a reassessment of some of the principles and practices in the policymaking with respect to the financial sector. Such changes could result in further crucial changes in the structure and oversight of the financial system worldwide. Abundant liquidity that existed for a longer period of time and the prevalence of lower interest rates are the important causes that led to the global search for higher yield and under-pricing of risk by the investors.

Background to the Crisis

The longer duration of the liquidity that was available with the financial institutions and other investors in general, rising asset prices especially the real estate prices and continued lower rates of interest amidst international financial integration and innovation has resulted in serious global macroeconomic imbalances. Bates, Kahle and Stulz (2007) have documented the abundance of cash held by the non-finance firms prior to the crisis. According to the authors, the net debt ratio (debt minus cash, divided by assets) exhibits a sharp secular decrease and most of this decrease in net debt is explained by the increase in cash holdings. The fall in net debt is so dramatic that the average net debt for U.S. firms is negative in 2004. In other words, on average, firms could have paid off their debt with their cash holdings.

As a consequence, the US current account deficit had swelled with capital inflows from Asian and oil-producing nations. In addition, there was a general trend of a global search for higher yield and this led to the underestimating of the risk factors in the alternative investment opportunities. Regulators on the other hand took policy decisions that either facilitated the imbalances or were ineffective in some cases to be a proper response for the adverse impact of the imbalances.

The abundant liquidity resulted in a rapid expansion of credit both in developed as well as emerging nations. The mortgage financing was found to be one of the high growth areas not only in the United States but also in many other countries which contributed to a bubble in the real estate prices. (World Bank)

Financial innovations in the form of alternative investment strategies have created systematic vulnerability in different ways. The best fitting example is the growth of the mortgage market which took the form of originate and distribute  implying the creation of mortgages for the purpose of selling them in the market. This model was overwhelmingly supported by new innovations in structured finance and credit derivatives. In addition, there existed an active secondary market for mortgage-related securities. The most serious part of the crisis is the becoming interconnected of both regulated and unregulated financial institutions through OTC markets. In fact, these institutions because of the interconnections had established bilateral clearing and settlement arrangements. (World Bank)

On the other hand, the favorable macroeconomic conditions that existed like the enhanced competition, advancement in technological standards and rising asset prices prompted the financial institutions to focus down-market. In order to maximize their earnings, the financial institutions indulged in practices like lowering credit underwriting standards, engaging in riskier trading activities with security mismatches and relying excessively on quantitative risk models. To meet these objectives the financial institutions also practiced the wrong principle of funding long-term investments using short-term instruments. (World Bank)

All these factors have created complacency among the capital market investors. As a result, they failed to employ adequate monitoring of the risks and proper reexamination of their investment portfolios. The slowdown and the subsequent decline in the US home prices since the year 2005 led to the unraveling of the highly leveraged and unsound lending practices that have been built over the period of time. These weaknesses in the lending practices were brought to light first in subprime lending. The other market segments like prime mortgage loans, commercial real estate, leveraged loans, etc were subsequently subjected to the brunt of the financial crisis.

According to Bloomberg (June 2008), the total write-offs since January 2007 on account of financial crisis stood at $ 245 billion with much more to follow. Dr. Jeffrey R. Bohn (2008) identifies the following factors as responsible for the creation of the subprime crisis. They are (i) Faulty risk assessment systems (VaR), (ii) flawed originate and distribute business model, (iii) ineffective credit rating given by the rating agencies, (iv) lax regulators who failed to anticipate the repercussions, (v) manipulative bankers who used the faulty systems to their advantage, (vi) fraudulent brokers taking the borrowers and lenders for a ride, (vii) mark-to-market accounting practice, (viii) greedy borrowers interested in getting free finance, (ix) greedy lenders interested in only higher returns, (x) faulty market structure, (xi) weakly structured finance, (xii) complications created by the derivatives and (xiii) lax monetary policy that proved ineffective to monitor the financial sector. Thus the crisis has been found to be the culmination of several factors; some of which are interrelated to each other.

Role of Hedge Funds in Subprime Crisis

An article entitled Subprime: Tentacles of a Crisis by Randall Dodd, a senior financial expert in the IMFs Monetary and Capital Markets department has examined the role of hedging funds in the subprime crisis that unfolded recently. He is of the opinion that the Fitch ratings forewarned about the risks of hedge funds even as early in the year 2005 by stating Hedge funds have quickly become important sources of capital to the credit market, but there are legitimate concerns that these funds may end up inadvertently exacerbating risks. According to Dodd there are obvious reasons for the warning issued by Fitch rating as the hedge funds making investments in largely high-risk ventures are not basically transparent as they need to be. There are no public disclosures of their assets, liabilities and trading activities. Moreover, the hedging funds are found to be highly leveraged in that they make use of several derivative instruments or heavily borrowed funds to make their investments. It is very hard for other investors and regulators to know much about the activities of these hedging funds and because of their higher leverage, their impact on the global credit markets is higher in proportion than the total assets under their management.

Dodd has identified a number of weaknesses that contributed to the market failure. The impact of the crisis is that it resulted in a 3 percentage point increase in serious delinquency rates on a subsection of US mortgages. This in fact has thrown the $ 57 trillion US financial system into turmoil and has caused economic shudders across many countries of the world. (Randall Dodd, 2007). They are

1. The first call of the turmoil arose at the point where the highest-risk tranches of subprime debt were placed with highly leveraged investors. Hedge funds were one among them with no capital adequacy requirements (since they remained unregulated in this regard) and the industry practice of investments with high leverage has prompted them to take excessive risks.
2. Another reason for the busting of the market is due to the reason that the unregulated and undercapitalized financial institutions were the primary liquidity providers to the OTC markets in the form of subprime collateralized debt obligations (CDOs) and other forms of credit derivatives. At the moment when trouble ensued in the solvency of those markets, those assets became illiquid and it led to the seizure of trading in them ultimately.
3. The presence of unregulated and undercapitalized mortgage originators was also responsible for the crunch. The originators like hedge funds were operating with a lesser amount of capital and they mainly used monies borrowed on short-term for funding the subprime mortgages they originated which were expected to be held by them only briefly. However, when a situation arose that it was no any more possible for them to sell such mortgages to those firms who packaged them into securities, many of these originators had to close down their shows which added to the crisis.
4. Lack of transparency in the transactions of OTC markets still exacerbated the crisis situation. Since the market participants were unable to identify the nature and location of the subprime mortgage it led to a sudden shift in the assessment of associated risks. At one point in time, the investors were overly optimistic about the risks associated with a subprime mortgage. With the turn of events in the negative direction in the subprime sector, those investors who were optimistic became scared and confused. As the result, the investors panicked and overestimated risk and shunned even senior investment-grade opportunities.
5. The liquidity crunch also affected the operations of the OTC markets. Instead of showing resilience in the face of greater price volatility, these markets ceased trading as counterparties became untrustworthy and buyers fled. (Randoll Dodd, 2007)

Thus hedge funds and other high-yield investors played a critical role in spreading the impact of the crisis to nations across the world. With the downfall in the prices of high-risk tranches, the investors could not trade out of their long positions. This made them resort to selling other assets, especially those with large unrealized appreciation such as equities in emerging markets to meet their obligations of margin calls or to offset the losses made in subprime deals. With the result the equity markets allover the world met a declining trend though they recovered quickly. The effect was there on the currencies of the emerging markets also. (Randoll Dodd, 2007)

Impact of Sub-Prime Crisis on Alternative Investments

The subprime crisis has taken the toll with at least 25 large subprime lenders declaring bankruptcy and substantial losses being announced by many financial institutions, bond insurers and special purpose enterprises. The impact on the US economy has been found to be significant resulting in lower levels of consumer spending, subdued levels of consumer confidence, lessened asset prices, and a significant decline in the projected growth levels and considerable rise in unemployment level. (AMUNC Background Paper, 2008)

When the crisis hit the subprime mortgage and credit markets the impact on the credit markets was that the markets dried up with deal volumes going to significantly low levels and this made the financial services firms to start thinking on their alternative moves. One of the victims of the crisis is Lehman Brothers which was made to file bankruptcy. Other institution like Washington Mutual had to increase the loan-loss reserves up to $ 2.2 billion to cover the mortgage exposure. Same is the case with some of the major financial services firms with five of them (Merrill Lynch ($ 3.4 billion), UBS ($ 3.3 billion), Citigroup ($ 3.1 billion), Deutsch Bank ($ 2.4 billion) and Morgan Stanley, JPMorgan Chase and Bank of America put together $ 3 billion) made to write-down $ 17 billion collectively. (Berkshire Capital Securities, 2007)

While the impact of the subprime crisis on the traditional long-only assets market is mixed, the biggest impact was felt on the alternative investment vehicles of hedge funds and private equity.

Impact on Hedge Funds

Theoretically hedge funds is to derive benefits from financial volatility as they are designed strategically to make their earnings both from rising and declining prices of assets. Of course, those hedge funds which were not overexposed to the subprime mortgage debts behaved according to this theory. But hedge funds that indulged themselves in more subprime mortgage debts have been found to be the prime victims of the liquidity crisis created by the crisis. The collapse of several hedge funds had a cascading effect on various banking and other financial institutions connected with them.

Just as the private equity funds the hedging funds are also subjected to the disadvantage of frequent reporting obligations and they also provide the investors the facility to withdraw their money with ease. Nervous investors are awaiting monthly numbers, which most hedge funds provide. If the investors want out, and they have fulfilled any requirement to keep the money in the fund for a certain amount of time, they can pull their capital. Too many redemptions can force funds to sell [assets] into a bad market, resulting in worse losses. (Jenny Anderson, 2007)

One of the biggest casualties of the subprime crisis happened in the case of UBS a leading bank in Switzerland. UBS after making a first-quarter (2007) loss of $ 123 million on US subprime mortgage investments had announced the folding of Dillon Read Capital Management back into its investment banking arm. This move cost the bank an additional $ 300 million by way of restructuring charges. The bank also indicated very weak profits for the second half of 2007. (Fi

Introduction

Foreign aid of different form and size has been given to a multitude of countries suffering from various crises. Since, in most cases, the amount of money provided as financial aid can be as large as several million dollars (or even several billion dollars in the long term), it is highly important to identify the effect this help makes on the receiving sides. The impact foreign aid makes on the countries economies has been tested in a variety of ways using quantitative and qualitative methods.

This paper presents a literature review that explores the research question does foreign aid affect a countrys economy? The review will first present general opinions of the scholars concerning this question. Further, the studies related to this subject will be organized based on the investigations of the impact of foreign aid in several specific countries located in different areas of the globe. Finally, the findings of the review will be described.

Also, the analysis of the findings, followed by the conclusion, will be presented at the end of the paper. The hypothesis that the present paper attempts to test is that the effect of the foreign aid on a countrys economy depends on such conditions as the geographical locations of the recipient countries, their levels of income, and the allocation of the provided foreign aid.

Literature Review

The mechanisms based on which the foreign help can affect the economies of the recipient states are multiple. For instance, some of the outcomes of the aid are the better ability to import technology or capital goods, the growth of the investment in human and physical capital, the increase of the recipients productivity and capacity of change, also, the aid adds to the savings of the state and provides more opportunities for development.¹

The impacts mentioned above are positive. However, scholars point out that there are a number of influences that may complicate the process of aid allocation and use. Some of such issues include the effectiveness of aid that may differ depending on versatile geographic locations and climatic conditions of the receiving states, political situations that produce a powerful impact on the allocation of aids, the institutional quality of the countries that may decrease the effectiveness of aid, and the low returns on them.² In addition, scholars have noticed a correlation between the rise in the amount of foreign aid granted to a state and the decrease in the foreign direct investment that seems to be in connection.³

The recipients of foreign aid are the developing countries that have shortages of resources. In most cases, such countries are rather dependent on the aids which they receive on a regular basis.⁴ The researchers who explore the relationship between economic growth and foreign aid inflow reveal mixed results⁵. According to the literature, in all the recipient countries, the government plays the most significant role in the allocation of aid.⁶

However, then treated fairly and transparently, the aid is helpful in terms of addressing such problems as the gaps of export-import, technological-knowhow, and saving-investment.⁷ Regardless of all the potential positive outcomes, the primary negative influence of the regular foreign aid provided in large amounts is the creation and maintenance of an external state debt that will create major pressure on a developing economy, preventing it from growing.⁸

The researchers sum up that the provision of foreign aid is beneficial only in some cases and turns out to be harmful in the others.⁹ All in all, it is up to the state leaders to decide whether or not the aid should be accepted and what kind of consequences it may produce for the domestic economy.

Many countries decide to receive the aid and accept the adverse effects that are likely to occur along with it.¹⁰ Sahoo and Sethi also add some more factors to the list of the contributors to the effectiveness of aid for the recipients; these factors include the bureaucratic efficiency, socioeconomic development level, and technological progress, and the institutions influence and role.¹¹

Naturally, in different countries, the effects of foreign aid would vary. That is why the vast majority of the researchers prefer to explore the issues of the impact of foreign aid on the countries economies in a more specific manner and focus on the variables of the particular recipients or unite them in groups based on the shared contributing factors. It is important to note that the findings of the researches often depend on the level on which they approach the question and the perspectives they follow investigating it.

Differently put, the examinations of the micro-level impacts of the foreign aids in different countries do with the help of cost-benefit analyses often reveal positive result and show that the air is helpful in a variety of ways; however, the cross-country studies that employ macro-level approaches and prefer to view the bigger picture show mixed and ambiguous results; this phenomenon is referred to as the micro-macro paradox¹²

Edwards evaluates the problem of effectiveness and impact of the foreign aid on the recipient states from the historical point of view and explores such factor as aid ownership; according to the author, this contributor is one of the most important in terms of planning and allocation of the resources received from abroad.¹³ That way, the question of the aid impact and efficiency becomes multidimensional and has various sides that carry different factors contributing to the final result. Moreover, the author emphasizes the importance of knowledge of the recipients history and development story for the donor to be able to evaluate the future level of the aids effectiveness.¹⁴

Overall, characterizing the studies that explore the effectiveness of foreign aid on the economies, Veiderpass and Andersson mention that they can be grouped into three types  the first generation studies that have the link between savings and aid as the main focus, the second generation studies that concentrate on the aid-investment-growth relationships, and the third generation ones that take into consideration multiple factors such as the improved country coverage, use of regressors representing the policy environment, acceptance of non-linearity in the aid-growth relationship.¹⁵

In order to explore the effects foreign aids have had on the economies of the specific countries, the further review will specifically focus on various regions of the globe and the states located there.

Foreign Aid Effects in the Countries of Asia

Studying the provision of foreign aid for Pakistan, Awan and Moeen-ud-Din point out that the country has developed a dependency on the externally given capitals, and this dependency is counterproductive.¹⁶ According to the evaluation and estimations of the authors, Pakistan has not benefited from the foreign aid in terms economic growth over the period between 1980 and 2012; at the same time, the researchers have noticed that the factor that produced the most significant positive effect on the economic growth of the country was the domestic investment.¹⁷

Moreover, discussing the situation in East Asia, Soesastro mentions that the ambitions of the countries of that region have been inspired by the successful development demonstrated by their Northeast neighbors such as Japan and Korea, who have managed to make use of the foreign aid and build up their economies.¹⁸

During the Cold War, the countries of Northeast Asia have received quite large amounts of aid from the United States which helped their economies to form a base sufficient for a powerful take-off and a future development, the aid was used to create stronger and more efficient domestic infrastructure (ports, highways, power generation), import, and export activities.¹⁹

Discussing the case of Bangladesh as a recipient of the foreign aid, Quibria also raises an argument that many scholars agree that the absorptive capacity of the developing countries can be rather limited; this statement means that such countries are unable to spend the aids effectively and in many cases, portions of it are wasted.²⁰ The author mentions that the discussion of the causes of the limited utilizing capacity in the developing states has been spoken about for several decades, and the professionals maintain that the main barriers to the efficiency of the foreign aid are the shortage of human capital and the insufficiency of infrastructure.²¹ That way, the more aid is provided, the more of it is wasted.

Foreign Aid Effects in the Countries of Africa

Rena emphasizes that Foreign aid can only be valuable, if the recipient country benefits from it in the reduction and elimination of poverty, inequality and unemployment through promotion of work-culture.²² In other words, ideally, the aid is supposed to stimulate the recipient nation to help itself develop and progress. Rena mentions that there is a substantial body of research that argues that the foreign aid does not generate any significant positive outcomes as most of the aid projects are supported by the foreign forces and as soon as they pull out, the project inevitable close down as the local leaders do not have the resources to support them.²³

This is the case in Namibia that is growing dependent on the foreign aid which depreciates the countrys economy, facilitates corruption, and leads to the aid to be spent on the projects that do not promote national growth.²⁴ Moreover, another threat that aid presents in a corrupt and dependent country is a risk of a civil conflict that may erupt around the capital package.²⁵

The countries of Africa are the most frequently used examples of the developing economies unable to allocate the aid effectively and, as a result, wasting most of it. The gap between the rich and the poor states of the world growth, and thus, the third world countries located in Africa are faced with the need to request aid from abroad which does not seem to be making much positive impact on the economic situations of the receiving sides.²⁶

Discussing the aid effectiveness problem among the African countries, Andrews asks a question which factors are outlined as those under development and concludes that apart from the growth of the GDP and the improvement of the quality of life of the local population, the overall development is the factor that counts (it involves economic, cultural, and social progress) and also economic opportunities, political freedoms, social freedoms, transparency and protective security.²⁷

The author maintains that the main reason for the failure of the aid to produce any significant positive effect in a long-term period is that it aims short-term problems (epidemics and seasonal challenges) and omits more general needs (infrastructure advancement, roads, energy generation).²⁸

The study by a Juselius, Moller and Tar argues in favor of the foreign aid effectiveness in the counties of African and provides a quantitative research that proves the positive impact on the GDP and investment in the majority of the assessed African economies, whereas negative effect of the foreign aid on the GDP and investment was detected in only five states.²⁹

In addition to the positive effects demonstrated by the previous study, the research conducted by ReCom that covered the provision of aid and its impacts on a variety of countries located all over the world throughout the 1990s and the beginning of the 2000s shows a significant decrease in the rates of poverty many regions including Sub-Saharan Africa.³⁰ However, the research fails to specify the exact mechanisms according to which the foreign aid was recognized as the driver of the poverty decrease. That way, the effect of aid does not seem to be direct. Instead, it may be concluded that the aid impacts some factors that stimulate the improvement of the economic situation and the quality of life of the population.

Foreign Aid Effects in the Countries of Europe

The study by Zupcevic and Causevic explores the aid provided to Bosnia and Herzegovina, a part of the former Yugoslavia that has faced a major crisis during and after a massive military conflict that burst out in the 1980s. After the conflict was over, the country was actively aided from the side of the European Union and the United States and the programs called CARDS and USAID accordingly. The programs targeted the reconstruction of the post-war damage, the democratization of the power in the country, legislative development, the improvement of the quality of life of the domestic population, and economic development.³¹

Discussing the barriers to the effective allocation of resources from abroad, the authors notice that Donors often implement similar projects with similar outcomes, which leads to inefficiency in the disbursement of funds.³² In order to avoid inefficiency, the aids are supervised by the IPA (the Instrument for Pre-Accession Assistance in the European Union); and in addition, Bosnia and Herzegovina has a detailed development plan that includes the steps that need to be put into practice within certain periods of time.³³

There is another European country that has been facing a lot of serious problems over the course of the last couple of decades. This country is Ukraine, one of the most frequently discussed states undergoing multiple crises at the same time and consuming large amounts of the foreign aid annually. Studying the current situation in Ukraine, Adarov et al. mention that the military conflict in the eastern part of the country has resulted in the rapid outflows of the capitals from the country; one more source of massive damage is the civil that is still in progress; overall, the country has lost billions of dollars over just a couple of years.³⁴

However, Ukraine has been a frequent and active recipient of the foreign aid decades before the war began. Regardless of the period, the larger portions of the provided funds were wasted and made no significant positive impact on the countrys economy.

The current situation in the state is characterized by a high level of unemployment, and ongoing military conflict, the displacement of hundreds of thousands of people, the lack of trust of the population to the government, and high rates of corruption are some of the most significant barriers to the aid efficiency in Ukraine.³⁵ The war has thrown the country several decades back in its development, and as a result, it became rather difficult to evaluate the impacts of the foreign aid in the prior years as well as to date.

Findings

To sum up, the findings in the studies examined in this review demonstrate that the foreign aid tends to have different effects on the economies if various recipients. Mainly, the outcomes of the aid are determined by the internal conditions and situations of the receiving states. The scholars outline a multitude of factors that contribute to the effectiveness of aid; among them, there are geographical locations, domestic incomes, the spheres where the aid is directed, the policies employed by the government, the political and economic environments within the countries. This set of factors remains the same regardless of the region where the recipient is located.

The finding of Andrews concerning the causes of the aid inefficiency in the counties of Africa states that the resources fail to make any long-term positive effect simply because they fail to target sustainable long-term projects.³⁶ This finding is in tune with the example used by Soesastro in reference of the successful allocation of the aids granted after the Cold War to Korea and Japan. Basically, the author emphasizes that the positive effect was achieved because the primary aims of the foreign aid in those countries were the projects such as power plants, highways, and other infrastructure improvements that further served as the ultimate basis for the development leaps of the economies.³⁷

Rena supports the argument of Soesastro and states that a developing state must be allowed to trade its way out of poverty through utilizing its own resources, by reinforcing its participation in international trade.³⁸ In other words, many scholars whose studies emphasize the adverse outcomes of the foreign aid provision maintain that the ongoing donations do not contribute to the development of the economies. On the contrary, the most likely outcome is the growing dependency, corruption, and the chances of internal conflicts.

Differently put, instead of stimulating growth of the developing countries, the foreign aid disrupts their viability and prevents them from boosting their domestic resources and heading towards financial independence.

To answer the research question, the majority of the reviewed studies and sources reported negative impacts of the foreign aid on the economies of the receiving countries regardless of their regions. Some studies indicated positive influences such as the reduction of poverty, growth of the GDP, and the attraction of the foreign direct investment, however, it was not explained how exactly the aid was related to all of these results.

At the same time, all of the reviewed sources mentioned that the effectiveness and the influence of the aid on an economy of the recipient is determined by a multitude of factors, which proves the hypothesis of this review that states that the effect of the foreign aid on a countrys economy depends on such conditions as the geographical locations of the recipient countries, their levels of income, and the allocation of the provided foreign aid.

Analysis

As noted by Soesastro, foreign aid is generally the outcome of an internal rough-and-tumble bureaucratic and political process and the barriers to the efficient allocation of aid are inflicted by the domestic issues, that way, it may be concluded that the countries that were deliberate about making change and progressing would succeed even without aid while those with significant obstacles would be likely to let the aid go to waste.³⁹

As Quibria raises the subject of the recipient countries absorptive capacity, the author also adds that it is difficult for a donor to measure this feature because there is no specific tool that would help to identify which amount of aid would be actually utilized with the use for the state.⁴⁰ This tendency makes the provision of aid even more risky and unclear in terms of outcomes that would be faced by the recipient.

Focusing on the countries historical backgrounds as some of the primary contributing factors to the effectiveness of the foreign aid allocation, Edwards points out the fact that the concept of foreign aid is rather recent; it only occurred and became a practice during the Cold War.⁴¹ Prior to that time, most of the Western countries with powerful and influential economies were reluctant to embrace this activity.

It is likely that during the Cold War the richer states of the globe were more open about directing funds to the developing countries for a purpose to strengthen their positions in the world and gain more allies in the worldwide fever inflicted by the recent ending of the Second World War the devastations that were still fresh and the horrors that were well-remembered. Struggling to prevent the War, the competing sides started to accumulate power, and a part of these strategies was ensuring the support of the developing states.

As a result, the powerful economies such as the USA and the USSR started to engage in the provision of aid to those who were attempting to grow. That way, the donors interest in the help provision is undeniable. However, it may be also true that the lack of growth in the recipient economies followed by the wasteful absorption of the money and goods that makes the receivers dependent on the aid is one of the primary benefits pursued by the donors. Such air providers are likely not to bother about the recipients readiness for aid, or if they have a plan of the resource allocation. Instead, it is possible, that the point of air is to make the developing economies dependent on the help from abroad and easy to manipulate for whatever resources or use they may have.

The perspective explained above is related to the Marxist and neo-Marxist view of the relationship between the donor and the recipient. The proponents of these theories maintained that the dependencies between the countries providing and receiving the aids and funds are artificially maintained, especially to bring back the former dominator-dominated relations between the former colonies and colonizers.⁴² According to the dependency theory of this type, the developing countries are pressurized into searching for the donors and then falling into the ongoing vicious circles of asking for aids, wasting them, accumulating the external debts, and sinking their weak economies.

Moreover, the Marxist theory that relies on the notion of the deliberate facilitation of the economic dependency of the developing recipients from the powerful donors (making the latter even more powerful) aligns with the smart power theory presented by Armitage and Nye; this approach combines the qualities of realism referred to as the hard power and the soft power that does not involve violence or aggression.⁴³

As an element of smart power strategies, the provision of foreign aid benefits the donors ensuring the support of the recipients and allowing the former to count on favors from the latter. However, from the perspective of the receiving sides, the foreign maid seems like a good way out of crises and economic challenges, but in reality, it is more likely to harm the economy in the long run than produce benefits for it.

Conclusion

The present study was focused on the exploration of the question concerning the effectiveness of the foreign aid for the receiving economies. The paper presented a literature review combining the information collected from multiple studies that examine the problem of the aid effectiveness and outcomes in general as well as the specific cases and estimations of the impacts of aids on the economies of the states of Asia, Africa, and Europe throughout several decades.

The findings presented by the reviewed studies are ambiguous and inconclusive. Some researchers emphasize the positive influence of the aids on the gross domestic product and the reduction of the poverty rates. However, the majority of the scholars provide evidence on the opposing opinion that maintains that the foreign aid has predominantly negative outcomes for the countries that receive it.

The developing economies tend to grow dependent on the aids and consume them on the regular basis failing to develop any domestic resources and work towards financial freedom. In addition, some more adverse impacts of the aids for the receivers include the growing risk of internal conflicts, a large external debt, and corruption. Analyzing the findings, one may conclude that foreign air allocation is a process that involves multiple dimensions and results in versatile outcomes depending on the factors that are included.

In order to make use of the foreign aid, a countrys leadership is to have a very clear and detailed plan of its allocation and far-sighted perspectives based on the long-term needs of the country. Unfortunately, in many cases, the developing economies cannot provide thorough panning and spending of the aid due to flawed leadership, weak infrastructure, and corrupt authorities. When it comes to the acquisition and allocation of the foreign aid, just one error is enough to put a country into the vicious circle of dependency on the foreign capitals. Such error is very easy to make and extremely difficult to fix as its consequences would be likely to snowball over some time and lead to irreparable adverse outcomes on a countrys economy.

Bibliography

Adarov, Amat, Vasily Astrov, Peter Havlik, Gábor Hunya, Michael Landesmann, and Leon Podkaminer. How to Stabilise the Economy of Ukraine. WIIW, (2015): 1-100.

Andrews, Nathan. Foreign aid and development in Africa: What the literature says and what the reality is. Journal of African Studies and Development, 1, no. 1 (2009): 008-0015.

Armitage, Richard L. and Joseph S. Nye. CSIS Commission on Smart Power. New York: the Center for Strategic and International Studies, 2007.

Awan, Abdul Ghafoor, and Muhammad Moeen-ud-Din. The Impact of Foreign Aid on Pakistans Economy. Science International, 27, no. 4 (2015): 3455-3459.

Edwards, Sebastian. Economic Development and the Effectiveness of Foreign Aid: a Historical Perspective. NBER Working Paper, no. 20685 (2014): 1-49.

Ekanayake. E. M., and Dasha Chatrna. The effect of foreign aid on economic growth in developing countries. Journal of International Business and Cultural Studies, (2009): 1-13.

Does aid promote development?. ReCom. Web.

Durbarry, Ramesh, Norman Gemmell, and David Greenaway. New Evidence on the Impact of Foreign Aid on Economic Growth. CREDIT, 98, no. 8 (n. d.): 1-47.

Juselius, Katarina, Niels Moller, and Finn Tar. The Long-Run Impact of Foreign Aid in 36 African Countries: Insights from Multivariate Time Series Analysis. Oxford Bulletin of Economics and Statistics, 76, no. 2 (2014): 0305-9049. Web.

Moreira, Sandrina Berthault. Evaluating the Impact of Foreign Aid on Economic Growth: a Cross-Country Study. Journal of Economic Development, 30, no. 2 (2005): 25-48.

Quibria, M. G. Aid Effectiveness in Bangladesh. (2010): 1-60.

Rena, Ravinder. Is Foreign Aid Panacea for African Problems? The Case of Namibia. Managing Global Transactions, 11, no. 3, (2013): 223-241.

Sahoo, Kalpana, and Narayan Sethi. Effect of Foreign Aid on Economic Growth and Development in India: An Empirical Analysis. South Asian Journal of Management, 20 no. 1 (2013): 1-13.

Soesastro, Hadi. Sustaining East Asias Economic Dynamism: The Role of Aid. PRI-OECD Research Project, (2004): 1-31.

Veiderpass, Ann, and Per-Åke Andersson. Foreign aid, economic growth and efficiency development. SADEV Report 1, (2007): 1-35.

Zupcevic, Merima, and Fikret Causevic. Case Study: Bosnia and Herzegovina. The Worldbank, (2009): 1-56. Web.

Footnotes

1. E. M. Ekanayake and Dasha Chatrna, The effect of foreign aid on economic growth in developing countries, Journal of International Business and Cultural Studies, (2009): 2.
2. Ibid.
3. Ibid.
4. Ramesh Durbarry, Norman Gemmell and David Greenaway, New Evidence on the Impact of Foreign Aid on Economic Growth, CREDIT, 98, no. 8 (n. d.): 2.
5. Ibid.
6. Ibid.
7. Kalpana Sahoo and Narayan Sethi, Effect of Foreign Aid on Economic Growth and Development in India: An Empirical Analysis, South Asian Journal of Management, 20 no. 1 (2013): 2.
8. Ibid, 3.
9. Ibid.
10. Ibid.
11. Ibid.
12. Sandrina Berthault Moreira, Evaluating the Impact of Foreign Aid on Economic Growth: a Cross-Country Study, Journal of Economic Development, 30, no. 2 (2005): 26.
13. Sebastian Edwards, Economic Development and the Effectiveness of Foreign Aid: a Historical Perspective, NBER Working Paper, no. 20685 (2014): 2.
14. Ibid, 3.
15. Ann Veiderpass and Per-Åke Andersson, Foreign aid, economic growth and efficiency development, SADEV Report 1, (2007): 4.
16. Abdul Ghafoor Awan and Muhammad Moeen-ud-Din, The Impact of Foreign Aid on Pakistans Economy, Science International, 27, no. 4 (2015): 3456.
17. Ibid, 3458.
18. Hadi Soesastro, Sustaining East Asias Economic Dynamism: The Role of Aid, PRI-OECD Research Project, (2004): 1.
19. Ibid.
20. M. G. Quibria, Aid Effectiveness in Bangladesh, (2010): 35.
21. Ibid, 35.
22. Ravinder Rena, Is Foreign Aid Panacea for African Problems? The Case of Namibia, Managing Global Transactions, 11, no. 3, (2013): 224.
23. Ibid, 230.
24. Ibid.
25. Ibid, 231.
26. Nathan Andrews, Foreign aid and development in Africa: What the literature says and what the reality is, Journal of African Studies and Development, 1, no. 1 (2009): 008.
27. Ibid.
28. Ibid, 009.
29. Katarina Juselius, Niels Moller an

Abstract

There has been ignorance of trade policy and the working conditions of employees until recently when people discovered that trade policy affects peoples work. The other form of ignorance was in the international trade formulation or policy where people did not see the relation of international trade and human rights. There were few reformers and specialists who tried to focus and solve the impacts of international trade and liberalization of markets on the standards of labor, but there was no response from the human rights activists and professionals and also their colleges who advocated for the trade policy. Even though there were these challenges in the past environmental groups and other organizations specifically labor coalitions have stayed put in publicizing violation of human rights in international trade hence precipitating in the formation of the World Trade Organization (W.T.O) which caters for the welfare of the workers and other interest groups¹.

The road to the formation of well organized grouping such as the W.T.O was rather bumpy since in 1998 some negotiators who were discussing the MAI, were focused on prioritizing the foreign investors rights over the rights of the public who were the majority hence creating a misunderstanding which led to the stalling of the negotiations.

Some negotiations measures in the liberalization of agricultural trade and also the agreement on agriculture which was done by W.T.O has brought about imbalances and hence leading to unfairness to the third world countries or developing nations. The liberalization of the agricultural trade has interfered to the right to food in some nations across the world. Many developed countries have for many years hampered the fundamental rights of the developing countries mostly the LDCS, this is due to the fact that they protect their products heavily by introducing subsidies and other tariff barriers hence disadvantaging the undeveloped nations.

It is noted that liberalization of trade mostly in the agricultural products and where there is unilateral liberalization can create a situation of food insecurity and increase poverty levels, particularly in the developing countries. This type of trade triggers fear mostly in small farmers since they are in completion with other farmers from developed nations where agricultural products are highly subsidized thus creating unfair trade². The right to food in this case is held back due to the liberalization of agricultural products and markets, since 80% of the populace in the developing nations is dependent on agriculture. Therefore there is a challenge to the world leaders to focus on formulating laws on international trade which will safeguard human dignity, protect people from being denied the right to food, ensure that international trade does not lead to the discrimination of others and protect the global social order. Agricultural liberalization is not the only aspect which leads to violation of human rights there are other forms of liberalization such as the liberalization of services. With these liberalized services some people are barricaded from having these essential rights such as access to clean water and other social and important services.

Introduction

In 1998 the Multilateral Agreement on Investment (MAI) talks were criticized by the public for coming up with policies which would undermine and endanger human rights. These policies which were to be ratified by the MAI caused a scare to the civil society and human rights activists thus leading to demonstrations. The activists unearthed the truth about the policies which were to be implemented and that the policies were for the reach countries in order to undermine the developing nations. With these appraisals in the streets of many countries around the world, the MAI fiasco revealed that the civil society and other activists were very influential in the eye of the public. The pressure on the MAI from the civil society marked the start of a new era of visible ad broad vigilance of anti-free trade associations and movements across the globe³. The civil society established a system where they addressed the public through e-mails and other internet services which had a very big impact until when the MAI talks were tilted in the right direction and led to the establishment of W.T.O. Although W.T.O has done a substantial job in ensuring a well balanced international trade activists seem not to be satisfied and engage the W.T.O to do more. As will be highlighted in the discussion, the W.T.O has always heeded to the call of the rich and developed nations which contribute big chunks of money for the running of the W.T.O offices hence neglecting developing nations which contribute very small amount s of money or none.

In order to understand more about international trade the discussion will be inclined more on the international trade policy maker which is World Trade Organization. Therefore, the paper will deeply look at the activities of W.T.O and whether it advocates for human rights and its inconsistencies in promoting human rights in the international trade. The paper will also focus on the world trade organization rules in the way they affect the implementation of human rights both in positive and negative aspects. In the recent past many activists have questioned the activities of W.T.O on whether it is doing enough inn protecting human rights and dignity. The discussion will describe some of the important and useful and also those approaches which are less important to international trade and human rights⁴. This discussion has an appeal to advocates of the human rights fraternity to consider their deliberations beyond the W.T.O and focus more on the inclusion of policy making in trade processes and bilateral and inter-country negotiations in trade. The appeal also challenges human rights advocates to enforce rules and other procedures to enable people to engage in a fare and free international trade which respect human rights and dignity. The discussion is concluded by appealing to the policy makers of member states of W.T.O to enthusiastically show how promoting of human rights among nations in the liberalized trade can lead to human dignity and respect of human rights, hence achieving a fair and equal trading system in the international markets.

Lack of Transparency and Human Rights inconsistencies in W.T.O

W.T.O has a history of being un-transparent and imbalanced in its processes of decision making hence making its integrity to be questionable. Being transparent or forthright does not make the institution to have positive or negative human rights results. However they complement in making the system to be just and respect human rights. These fundamental principles of an institution go in contrast to the principles of human rights for example the right to democratically participate in the decision making processes of a country which is embodied in the human rights article 21.

In W.T.O there are two important dimensions which lead to participation and transparency and they are: external dimensions and internal dimensions. External transparency means that the non governmental organizations do not have the right to take part in the activities of W.T.O nor accessing its work. This means that W.T.O has not formal relations with the NGOs and it is the only organization which has this status⁵. However the W.T.O has a liaison wing which engages in providing information and organizing events with them but they do not have any legal obligations to do so. Therefore this means that the relationship between the NGOs and W.T.O is adhoc and the reversal of the status can be done in any time without informing the NGOs in advance. With recent developments the access of information in the W.T.Os offices has been made less complicated as the availability of the documents is done faster. However not all document are made available to the public or the NGOs until if they are of great importance or relevant. The other issue about external transparency is about the committees of W.T.O whether they should do their sittings in public or not in some occasions and if the civil society should be considered dispute settlement thus making the proceedings and out comes accepted to the public.

There has been a greater increase of pressure from the United States for the W.T.O to increase its openness on its proceedings and the accessibility of information but the W.T.O has not succumbed. The members deny accessibility of information by the NGOs and other organization due to suspicion⁶. Moreover other members deny the accessibility of the documents due to the present negotiations which they dont like publicized since it might be used to harm other countries of their interest. Many members deem it more important for countries to engage in giving information to NGOs in the domestic level rather opening the organization to public scrutiny at higher levels. W.T.O defines the NGOs together with other groups which represent the interests of business community. This makes the organization to be criticized by many civil societies and human rights groups. For example more than 961 non governmental organizations which were invited in the Fifth Ministerial Conference in 2003 only three quarters of them were NGOs the other were groups which represented businesses and private cooperates.

The representation of private businesses in the international trade organizations shows that the common citizens are not well represented thus making a proper avenue of violating of human rights through the policy formulation and the implementation of international trade rules and regulations. In the past there was a dispute between two photographic giants from the U.S and Japan thus signifying the interest of private firms. More recently there was a representation of the rights of a big and known pharmaceutical industry which was represented on an equal level with those of other countries. This means that W.T.O is ready to compromiser the health of many citizens in order to favor one multinational country hence violating the rights of other people in the world. In this dispute the U.S was alone against the implementation of TRIPS (Trade related Intellectual Property Rights) and health care or public health, which was to increase the access of medicines and other medical facilities⁷.

This dispute was unblocked by the director general of W.T.O where he pressured other countries to accommodate the views of others hence weakening the TRIPS and the medical care mandate and thereby giving the United States a comfortable accommodation. Countries who have signed this agreement on TRIPS have not been prevented in any way from accessing higher standards, but the agreement limits these countries from going beyond what the agreement states, therefore impeding the fundamental right of accessing proper health care services. Moreover the developed nations have off late been pushing for a higher IP mode of regulation. This higher level of IP standards go beyond the original agreement thus making it more difficult for the developing nations to progress for their push for equality. These policies are being pushed by the WIPO treaties and other agreements such as the bilateral and regional treaties. These IP rules have extended the patent protection by far and beyond the required maximum of twenty years. The developed countries have limited the ability of developing nations to reduce the cost of medicines and restricted the same countries from issuing licenses to other companies. Other countries like Switzerland are trying to impose these higher IP standards and also the members of the European Union.

Many powerful countries and large organizations can dictate the way policies are made in W.T.O committees in order to suit them thus undermining the interest of the public which lead in the violation of human rights through trading and other deals which are done in the expense of the public⁸. The influential organizations lobby governments to adopt certain policies which are short-term and of private interest rather focusing on the general public, this type of imbalance in trade policy participation is worrying since the human rights end up being violated for financial good of some companies.

The other W.T.O dimension which leads to international traders violating human rights is the internal transparency of the member states and also their participation in policy making and other decision making processes. Many member countries of the world trade organization do not actively participate in policy making process just like the general public thus making it easier for other countries to come up with policies which adversely affect the human rights in a negative manner. In theoretical terms W.T.O has enabled members to be equal since every member has a single vote. However in reality the developing nations are cajoled and forced to vote in the favor of the rich nations since they enjoy grants and loans from the same countries. It is important to note that many of the third word countries cannot even maintain a representative in Geneva which makes it even more difficult to be involved in trade policy formulation. As compared to countries such as America and Japan who have more than ten representatives in the same conference.

In addition, poor countries are obligated to trade their rights with these developed nations thus making concessions. The practical part of the W.T.O rules on international trade is more inclined to the developed nations rather than reflecting on the development and interest of the poor nations and their citizens. Since the establishment of this organization the mighty countries have developed cold feet in implementing policies that are in favor of the developing countries in order to maintain the status quo. Developed nations are implementing trade policies which negative impact on the poor nations such as investment rules of 2003 and labor standard of 1999⁹.On the other hand poor countries have been voicing their concerns of lack of transparency and insensitivity of the W.T.O since the ministerial conference of 1999.In this conference the developed countries ignored the concerns of the poor countries hence leading to its collapse this is because the developed countries did not agree on the Ministerial Declaration draft. But since then the situation of the W.T.O has not changed thus continuously undermining the rights of the many who are from poor countries.

The international trade has been revolutionized thus making many citizens get access to medical care and other services; this has happed because many developing countries have stood their ground by not allowing the developed countries to arm twist them. For example they have been able to successfully obtain agreements on proper access of medicines and TRIPS agreement. With such achievements the international trade is becoming more and more balanced and it is also becoming proactive to human rights and up holding human dignity. But the developing countries have continuously pushed their agenda forward by making their policies and concerns which do not benefit other countries or their citizens. To push their agenda forward the developed countries have influenced the organization and there have been mini-ministerial meetings which are unofficial since only few invited and selected countries meet¹⁰. These small committees are the key pillar of the Geneva conference since they are copse of only the developed countries where their issues are addressed. There have been activism from the NGOs who raise this concern and many developed nations are shifting their focus from the W.T.O to the bilateral trade and regional agreements for international trade liberalization. The U.S for instance has prioritized this form of trade which was triggered by the failure of Cancun Ministerial. The U.S has launched talks with countries like Kenya, Dominican Republic, Colombia, and Rwanda. This is a worrying trend in the human rights point of view since these countries will be arm twisted to accept the policies of United States. The human rights activists see this kind of trade as more troublesome in undermining human rights compared to the W.T.O which is more accommodating. In achieving proper medical care and transparency the regional and bilateral trade has boosted the image of W.TO.

The human rights laws require countries or other traders in the international trade to listen to the most venerable countries and citizens and empower them through transparency and participation in a democratic manner. But the W.T.O structure is directly opposite from this universal law of humanity. The W.T.O has a history of not heeding to internal and external democracy thus undermining the concerns of the public interest hence going against the full realization of human rights and social justice in the international trade and order. Whilst there is need to push for a better democratic and transparent W.T.O, it is of essence to note that human rights and other social justices are more guaranteed in the W.T.O rather than in regional and bilateral trade or in the clear absence of international trade regulations and rules. The human rights advocates and other activists should continue to push for better trade rules and observance of human rights in bilateral and regional agreements as they deed in the W.T.O in order to achieve their goals fro more equitable trade.

Limiting Policies to Governments

Tirade policies and rules do not impede human rights directly but the rules are crafted in a way that if they are implemented they will raise eye brows on the human rights platform. The most particular way in which these rules are in consistent with the human rights regulations is that they regulate governments from taking actions which will promote or enforce human rights rules. While the international organization of trade is trying to promote trade, it is also advocating the free movement of products from different countries hence putting some limitation on government regulation of the same. This procedure makes the governments unable to protect its citizens and other vulnerable groups¹¹. By allowing free flow of products in countries many activists are concerned with products such as food and other essential services like healthcare, education and water. Many people around the globe specifically those from the developing countries have bee barricaded from accessing these essential services due to international trade and its regulations. It is only that these injustices are not highlighted in the public eye for scrutiny but if they were the list could be endless.

In order for a country to implement fully human rights regulations it is required to have effective and efficient national policies which will not be shaken by the international regulations. These policies must be different from other countries since the idea of harmonizing these policies will not offer very good results and solutions. Countries must be given free and flexible space in order to develop proper policies which will be of benefit to the citizens and also protect their human rights. As discussed earlier in this paper the international trade regulations and practices will impede policy development in individual countries hence making it easier for these countries top develop the policies alone without the consultation of W.T.O. Engaging the W.T.O and its cronies will curtail the policy development space and its flexibility.

Liberalization of markets gives other countries an opportunity to trade in foreign and domestic markets. The range of services provide by the W.T.O range is very wide. Such services which are allowed to trade in these, markets are: accounting, nursing, tourism, telecommunication and transport. Due to this influx of services and the W.T.O policies governments are unable to control theses services thus compromising on service delivery of its citizens, which eventually hinders the public from enjoying their freedoms and human rights. People who advocate for liberalization of markets point out that, W.T.O has no regard for privatization or deregulation. Therefore, W.T.O does not require any member country to open up its market for international traders and businesses.

Liberalization and Privatization of Service Sectors

To start with privatization, liberalization is not explicitly dependent on privatization of different service sectors in a country. However, in allowing many firms to compete for a particular market is good in eliminating monopoly and this does not exclude public monopoly. This procedure is directly linked to privatization. It was in the early 1990s when there was introduction of services in the international trading systems hence resulting to GATS (General Agreement on Trade in Services). The introduction of the service sector in the international trade was the beginning of interference of individual governs activities in providing services, by the W.T.O¹². This process has since then been undermining the enjoyment of rights to some people since not all services reach them at the intended prices and quality as the government would have provide.

In some countries privatization of sectors has had a greater impact to the peoples for example in Asia the telecommunication sector has greatly improved. There has been good quality products and of better prices which are affordable by the majority of the people in that region. In other places across the world the system has been in two ways since there is emergence of service supply which has led to the increase of costs thus separating the poor from the rich who can afford these services. This means there is a sense of inequality thus making the poor to be robbed off their rights, since some of these services are important. In some countries privatization has denied the poor the right to access these fundamental services altogether. For instance in a country like Ghana water services which are basic requirement for the citizens are too expensive for some people to afford, even though the government in collaboration world bank has put the prices far below the market rates. Therefore, the private sector is not the best in providing such important amenities which are important and not lucrative as water since they are driven by profits and commercial benefits not the public interest.

Governments of individual countries are not obliged by the human rights rules to be the only providers of essential services such as water. On the other hand the government has the obligation to ensure that essential services are available and affordable to every one, especially the marginalized, poor and vulnerable. The current system of privatizing services has discriminated the poor more so the marginalized and venerable areas of a population which is against the human rights laws. The human rights cardinal law has a principle which states that there should be no discrimination of services whatsoever. This shows that some governments have failed in being the custodians of human rights on behalf of the public. To add too that, in making the accessibly of essential services to the people more difficult, privatization and market liberalization makes it harder for individual governments to even regulate. Some international organizations such the World Bank which are involved in this debate of provision of essential services to the people view it appropriate to regulate services as important so as to curb cartels that benefit at the risk of peoples lives. Regulating services such as water is a duty to the government not only a need. Governments are required by the human rights laws to come up with appropriate registration, budget and other measure to ensure that human rights of all citizens are fulfilled.

In practice governments finds it difficult to impose regulation s on foreign companies which are providing services to the country. This makes the government to fore go its duty to fulfill the rights of its citizens in order for the companies to continue working in that country. For instance private companies in the health quarter usually subvert the regulation to favor them through imposing political pressure to the government of the day. The private sector also poses some difficulties which make the government unable to regulate a particular sector thus ending up undermining the public interest. Service trade rules are aimed at removing obstacles which come up in the way of doing business just like in other trade regulations and rules. Whilst regulation of goods is done at the national borders, it is different imposing barriers for the services since they are far diverse. The difficulties of imposing barriers on trade in services are encountered because they affect the important areas of domestic regulations. Therefore, the requirement of World Health Organization (W.H.O) in regulating such sectors becomes very difficult.

Human rights activists have been advocating for the assessment of service policies and their impact on the well being of the people. By so doing NGOs are able to monitor these policies on whether they are bin tandem with the human rights regulations and rules. The commission on human rights is putting pressure on individual nations to be more proactive in regulating services and ensure that they adhere to human rights policies. The commission has identified that t in order to implement the human rights regulations it is important to constantly examine the trade policy and law as it directly affects the human rights. This constant examination of the trade policies ensures that the fundamental human rights are not violated. Therefore, the human rights activists have the responsibility to ensure that trade rules and regulations adhere to human rights laws.

International Labor Rights

In the international law there are flexibilities of commercial agreements which allow countries to discharge their duties and responsibilities in terms of promoting and enforcing laws which protect human rights. These international laws are specifically designed to meet the core labor freedoms and rights. However these laws have not been enforced very well by W.T.O for countries to be able to define their interaction between nations. For instance these laws give powers to individual countries to protect their interest and those of their citizens other than playing ball for the commercial interest. Many countries have used this article of the law to protect the public morals, environment and public health which would have been undermined if these laws were not there¹³. Another thing deemed important is the Vienna Convention which defines the law of Treaties. This interpretation helps countries to choose the type of treaties to engage in after authorization by member states. If the member states feel that the deal is unjust they have the right to engage in dispute settlement process. This action helps marginalized member sates who are not able to defend their rights in front of the developed nations.

The international labor Organization (ILO) has had an outstanding performance since its establishment.ILO monitors the implementation of labor standards. This organization independently publishes the list of nations or organizations that violate the international labor standards and internationally accredited labor rights. These reports are used by the U.S government for the market entry of organizations and countries which have improved and enforced international labor rights fully. These reports have proven important to many countries since they are able to monitor other countries before they engage in any international trade or any other business as may be perceived, some countries are also able to advice their companies before investing in other countries.

International governance has been hit by many difficulties which have been solved by democrats who engage tools of participation and transparent augmentation, but some difficulties still remain unresolved¹⁴. The main problem which has not yet been resolved is the great diversity and division between the rich and poor nations¹⁵. There is also the need to create better labor standards and create a good and friendly environment. Many solutions have been tried to be resolved both locally and internationally but some have ended in walk outs and disputes in such conferences. Some of the challenges have been to invoke good and credible leadership in these forums and to have people who do not shy away from these difficulties and by doing so this problem of trade regulations and labor rights enforcement will be resolved amicably. Many technocrats and business people say that they do not see the democracy and deliberations made by the democrats in other arenas but these enthusiastic deliberations seem not to be there in the international context. If these deliberations were there, change could be seen in three levels of governance and mostly in the workers level, which will improve their labor standards. The area of labor rights and standards will improve and people will have a greater understanding of the international law of trade and labor. This means that many countries and organizations which are in the international markets and trade will be more credible hence winning accolades from all quarters of the world. By educating the citizens through monitoring and implementing international policies for labor standards will increase and improve legitimacy of nations in the world. To be able to enforce international policies on labor standards countries should fast begin in their own countries before extending to the international markets, this makes the countries to have a base line for their argument.

Roles of NGOs in Globalization and Human Rights protection

Abstract

A cultural and art event or festival celebrates societies related to a specific place or people. Hong Kong is considered a unique cultural position; it combines the traditional culture of China and the West simultaneously. Due to its colonial history, Hong Kong people appear to be simultaneously influenced by Western and Eastern cultures. The research aims to check the governments involvement in cultural events in Hong Kong. At the same time, considerable attention is also devoted to cultural events that have occurred worldwide. Therefore, the study also aspires to analyze the authorities involvement in cultural events conducted beyond Hong Kong.

Cultural events can have multiple practical benefits for the people, for instance, for the students. Participating in such events makes students more passionate and confident about their culture. These events also help foster team spirit and a strong sense of responsibility among the students. The researcher collected qualitative data from primary sources, meaning that interviews were conducted with eight respondents. The respondents responses were analysed using thematic analysis, where several themes were constructed. A discussion of the data was then held, and the level of involvement of the Hong Kong government and authorities around the world in cultural events was ascertained.

Introduction

A cultural and art event or festival refers to a celebration of societies related to a specific place or people observed by Zhang et al. (2019). Currently, Hosagrahar et al. (2016) noticed that culture is on the agenda of cities, territories, and regions. The technological dimension of culture is emphasised more through the global or international perspective. The local perspective has reminded that culture matters first as social capital. Every month a large number of cultural and art events hosts by Hong Kong. HKTB has bundled a range of cultural events and art landmarks in Hong Kong to promote visitors and international media (Hong Kong arts month, 2022). Every May is an eventful month as extravaganzas for the art, and the traditional city celebration join together. International tourists visit Hong Kong for various events in the city every year. Art Basel and The Cheung Chau Bun Festival possibly refer to the significant events during this period. (Duangdee and Sirikulchayanont, 2019).

Hong Kongs government categorises cultural and art development within the same policies. It cultivates art development organisations and provides financial assistance. Such as the association of the Hong Kong Arts Festival(HKAF) has been rooted in Hong Kong for 50 years. According to Gov.hk. (2022), HKAF refers to a major international arts festival and seems to be committed to enriching the citys cultural life by presenting leading local and international artists within all genres of the performing arts. The celebrations have given the top international artists across multiple genres such as music opera, Chinese opera, and ballet for breaking the dance and experimental theatre. Moreover, according to Lam (2016), the Arts and Sports Development Fund (ASDF), considered a sub-fund for Recreation, seems to be deployed in endorsing the development of arts, culture, and sports.

As a facilitator, the government of Hong Kong seems to be committed to upholding the freedom of cultural and artistic creation and expression. However, the government has provided an environment that supports the development of culture and arts. The government, along with its partners, has been enhancing the cultural software of Hong Kong by using a multi-pronged approach, such as the development of cultural programs, promotion of arts education and nurturing of the workforce, etc. On top of capital workings, HK$400 million is spent by the government on the arts and culture annually (Ho, 2017). Cultural festivals are the most effective way for communities to express themselves culturally. Festivals also have a monetary value in the communities where they are hosted.

As a result, they represent an essential economic activity for the host communities economic development. Arts and culture festivals, as financial endeavors, provide employment and commercial possibilities in the host communities through their inherent value chain. Hong Kong festivals are often lavish with street parades, packed temples, and performing art (Dance, Music, Drama). Leisure and Cultural Services Department(LCSD) present: The seventh edition of the cultural festivals in Hong Kong returns in November 2021, observed by Hong Kong Culture Festival (2022). Forces have also joined with the organisations of culture plus local communities to present a collection of programs throughout the celebration of the cultural heritage of Hong Kong. Moreover, the citys destination authorities have also made widespread use of cultural festivals as a medium to attract cultural tourists and add vitality to the scene of local culture.

Meanwhile, it is essential to mention the cultural events outside Hong Kong. Carnival in Rio attracts more than half a million visitors each year from all over the world and is considered the biggest carnival in Brazil. Venice has spent ¬1,300,000 on the carnival in recent years (Dittmer & Bos, 2019, p. 43). More than half of this amount is offset by sponsors and ticket revenues from gala dinners and parties in the palaces. Spains festivals are unique and incredible events not found elsewhere. It is also possible to note the Tomatina; it has long been one of Spains most visited and fun holidays (Dittmer & Bos, 2019). The public authorities sponsor the importation of vegetables and organize street security. Thus, the authorities are involved to a certain degree in organizing festivals and other events worldwide.

Problem Statement

According to Kim et al. (2018), events play an essential role in a countrys difference and good image. However, Ojo (2021) observed that events are crucial for maintaining a society. There are countless social, economic, and religious festivals and cultural events throughout the world. The Hong Kong government has contributed precious little to maintaining the citys unique culture, through which its originality and heritage are lost. At the same time, for example, in Brazil and Spain, festivals also reflect the peoples cultural traditions. However, the authorities do not assume full responsibility for their organization. However, there are few studies on the impact of events on tourist attitudes toward a destination or outcomes such as satisfaction, repeat visits, or others. The local and national governments much need the adaption of creativities for the promotion of events over a global and local scale to improve the image, political situation, and economic development of the city noticed by Lau & Li (2015). Hence, the study was conducted to understand further the importance of cultural events and the governments roles in planning cultural events.

Research Aims and Objectives

The research aims to check the involvement of the government in cultural events in Hong Kong. To reach the aim, the following objectives are conducted:

• To understand the importance of cultural and art events for Hong Kong city
• To explore the governments plans for the growth of local cultural and art events.
• To identify an efficient way of planning an event that has an impact on Hong Kongs socioeconomic and environmental conditions.
• To focus attention on important cultural events in the world.
• Identify government involvement in the organization of festivals and other events in the world.
• To provide recommendations for the improvement of government policies in cultural and art events.

Research Questions

In order to accomplish each objective, following questions will going to be answered throughout the study for providing a route through the research:

• What is the importance of cultural and artevents in the city of Hong Kong?
• What is the significance of cultural and artistic events in Hong Kong City, Bunyol and Rio de Janeiro?
• How socioeconomic and environmental conditions of Hong Kong impacted through the planning of an event?
• What would be the recommended strategies towards the improvement in current government policies for cultural and artevents?

Rationale of Study

According to Pirnar et al. (2019), festivals seem to be universally crucial for social and cultural roles, and increasingly they have been encouraged as the attractions of tourists. The cultural identities represented by the cultural festivals have served as a career of national emotions. The challenges for the organizers and attendees of festivals are presented by evaluating sustainability related to cultural festival tourism. Amazon (2022) observed that the governments contribution to the events industry results in the benefits of society as a whole or for the targeted groups involved in it. As the policy of culture has been assigned the role of promoting cultural activities, the procedure started to focus on areas that seem difficult for the market to sustain. However, the effectiveness of state cultural policy varies depending on the type of events, especially the authorities providing the organization, facilitation, and support of community events by providing facilities, funding, or others. According to De Salvo et al. (2017), governments play an essential role in the protection of health, safety, and happiness of Hong Kong and whereas helpful for the support towards the safe and secure delivery of the events.

Moreover, Learning to Give (2022) noticed that festivals throughout the public sector as well as non-profits, along with deep funding and support through the local authorities, involvement of government exists as one of the matters related to the legal or political necessity. Any did not convince a stakeholder of the respondents to assume all of the financial risks associated with the festivals. However, in such cases of publicly possessed principles, that has been a debatable point since the holding of responsibility by the government.

Literature Review

Introduction

Hong Kongs culture is a mixture of Southeast Chinese traditions and Western culture. The natives of Hong Kong appear to be extremely proud and confident in the achievements of their culture (Wu et al., 2022). They want to preserve the old Chinese customs of their culture and the integrity of their colonial heritage. It is essential to understand their culture and develop an interest in their history, civilization, customs, food, and practices related to business and religion (Hinsbergh, 2020). The Hong Kong government encourages creative freedom in culture, provides opportunities for participation, and promotes artistic excellence (Ho and Lous, 2017). It is significant to note that Brazil is a country with an extraordinarily extensive and diverse culture, bringing together the traditions of immigrants from all parts of the planet. This cultural mixing ensures that there is a huge variety of dances in Brazil. All the cultural trends in Spain reflect the passionate nature of its inhabitants (Dittmer & Bos, 2019). European and Mediterranean cultures have blended together to make Spain one of the richest countries in terms of culture.

Importance of Cultural and Art Events

It is important to note that cultural events bring citizens together and contribute to the development of cities. In Brazil, the carnival in Rio de Janeiro, in Spain the Tomatina festival and various festivals and holidays in Hong Kong contribute to the social and cultural enrichment of residents and tourists. Meanwhile, they enrich local city budgets through the development of tourism (Richards, 2020). Tan & Ibrahim (2017) noticed that as human beings, social interactions with fellow beings are not only a source of happiness but its growth of capacity for the purpose of learning languages and familiarizing with the cultures.

According to Yusuf et al. (2020), Cultural Events are one of the expressive ways the celebrations of glorious heritage, traditions and culture are considered as a route of rejoicing superior moments and emotions throughout the lives with loved ones. However, Yuan (2016) observed that events play a vital role in adding up the structure towards the social lives through the connection with families plus backgrounds as in todays stressful planet, happiness seems to be outshined through the negativity, and the need for positivity felt timely. Cultural events substitute a kind of respect and open-mindedness for most countries as the celebration of differences and common interests unite and educate the children about religious and cultural festivals through the framework of family experiences.

Culturalevents seems to be gradually becoming stadia of discourse through which people has been enabled to view on wider cultural, political and social issues. Apart from fun, an offering of social and economic benefits towards the communities also exists from the well management of events was observed by Brownett (2018) which includes an increase in expenditures, creation of employment as well as increase in the standard of living plus the awareness of area. However, the act of cultural events accumulate and transmit the human experience by shaping the working ways of the people through a difference in the viewing ways of themselves and others as well.

Cultural events can have multiple practical benefits for the people as well. The mass cultural and spectacular events, as a part of the tourist industry, have considerable economic potential for the development of the cities in which they occur (Nadotti & Vannoni, 2019). Appropriate organization of such activities enables to attract new tourist flows to the areas, and with them the money that remains in these regions. There are many options and techniques for organizing mass cultural and entertainment events in different countries. Such activities enhance the competitiveness of countries, which causes them to develop more quickly (Nadotti & Vannoni, 2019). The most obvious benefit of tourism is an expansion of jobs in hotels, restaurants, and retail businesses. The second, less visible advantage is the support of individual industries and professions (Nadotti & Vannoni, 2019). At the same time, the organization of cultural events not only creates more jobs and improves the economic situation of regions, but also contributes to spreading a positive political image of the state.

Government Role in Cultural and Art Events

According to Macrae (2016) the specific obligations for several people as well as agencies, the safety of event is considered as a major responsibility that should be focused by the event organizers, government and public. Mitchell et al. (2016) observed that the structures of effective governance and event planning helps in order to ensure about such situation. However, festivals and events seems to be outsourced by the governments towards the nonprofitorganizations and for the profit companies for the purpose of shedding their risks or at least subtle it was observed by Sasse et al. (2019). Government holds the duty of care for working along with other agencies plus with the event organizers for the purpose of ensuring about the appropriate practices of risk management to be in the place of events where they may face any impact.

The Brazilian and Spanish authorities devote considerable attention to the development of culture, especially the internationally famous festivals. The departments of culture assist in the organization of events and ensure public order (Fernández-Tabales et al., 2017). For example, during tomato battles and dances in the streets, special control is required to ensure the basic rights of the population. At the same time, in Spain, city authorities facilitate the prompt delivery of tomatoes and involve doctors, police and other services to ensure order. After the celebration, the state budget receives about 18 million euros annually from the event (Fernández-Tabales et al., 2017, p. 1276). Similarly, in Brazil, authorities involve law enforcement and medics to patrol the streets during the Rio de Janeiro Carnival. Local and state authorities provide rehearsal facilities and financial support.

According to Wang (2018) the government of Hong Kong is well known by its efficiency, transparency as well as fairness. A proactive approach has also been taken by the government of Hong Kong plus to remove the restrictions of market and the promotion of every event throughout the region. However, according to Hemingway &Gunawan (2018) event organizers have also been ensured by the government about the understanding and preparation for the management of risk as well as hazards linked with the planning and delivery of events. Further, the government might be able for providing the direction, setting of expectations as well as offering guidance for the events that use public spaces. When government becomes the owner and organizer of an event, they holds the primary responsibility for the safety and security of the event.

The government should accentuate the intrinsic value and also the social and economic values of arts and cultures. The lower tiers of government would be the most important in organizing such events and promoting the value of cultural festivals. Furthermore, the government has the responsibility to market its culture to the foreigners to encourage them to visit their country and experience their culture (Luo & Chui, 2016). This can be mainly done via the media platforms where specific documentaries can be used by the local authorities to demonstrate their culture. Moreover, the government can collaborate with other foreign governments to hold talks regarding organizing such events at foreign territories. This encourages the students and other local community members to participate in these festivals and get a chance to know the culture of the other countries as well.

Governments Plan for The Local Cultural and Art Events Growth

The culture of Hong Kong has gained much attention in fewer decades and multiple cultures from different regions of the world as well as traditions of Chinese customs have immensely indulged in the culture of Hong Kong and declared an international culture. In Brazil and Spain, culture is also especially significant in forming an international image. Thus, governments have decided to develop culture and implement it in the public interest. In addition to each cultural events new level of creativity, government agencies work to promote investment and social cohesion. These activities will all contribute to transforming Hong Kong, Rio de Janeiro, and Bunyol into centers of new cultures capable of accommodating people of all backgrounds (Chan, 2018).

State governments and city leaders implement basic policies, which are as follows. First, government plans encourage aspiring residents to participate in cultural events in various roles, such as developing their talents and businesses or building intercultural connections (Nadotti & Vannoni, 2019). At the same time, government agencies in cities where cultural events occur create favorable conditions for them to appear. For example, they allocate significant investments to improve roads and infrastructures or provide local life with additional financial resources to support their local businesses. In the case of the carnival in Rio de Janeiro, such contributions facilitate the filling of the state budget and urban enhancement (Nadotti & Vannoni, 2019). It is significant to observe that government bodies affected by cultural policy offer innovative ideas to preserve the states traditions and, at the same time, develop in the cultural sphere.

This significantly affects the stable development of cities and, at the same time, the influx of new sources of investment, residents, and improved living standards (Morris, 2015). Therefore, all these activities will assist in transforming Hong Kong, Rio de Janeiro, and Bunyol into a center of new cultures. It is noteworthy to emphasize that the government promotes the organization of cultural events to provide a better criterion of living for the individuals. Therefore, government agencies plans also include the social and environmental spheres (Luo & Chui, 2016). Festivals, carnivals, and celebrations aim to improve social equality, protection, and abundance of citizens.

Impact of cultural and Art Events on Socioeconomic and Environment Conditions

From the beginning of the world, people from all backgrounds set a schedule for celebrating events and occasions. They made it a priority and began to prepare for specific events long in advance and dressed according to the events theme. These include carnivals, parades, and festivals, which serve as sources of joy and provide excitement and new ways of expressing feelings and emotions (Boden et al., 2017). Many scholars have noticed that traditional customs and festivals have lost their charm and significance in the chaos of the modern world. That is because people have turned their lives into machines and cannot escape from the hectic routine and enjoy the attractions of the modern world. Along with these benefits, festivals retain tremendous importance for the country because they have a profound and long-lasting effect on society and the countrys economy (de Valck et al., 2016).

The event generally functions as a bridge between people and places and leaves individuals with traces of memories, and enhances the value of a place intended to celebrate a particular holiday. This event presents an opportunity to connect with new personalities. It promotes a friendly atmosphere between people of different cultures, understanding each others cultures and enjoying the flavor of various customs. Using a place to celebrate is a symbolic sign of a place, attracts tourists to visit, and inspires with its attraction (Finkel & Platt, 2020).

Cultural and art events usually help promote the value of place as well as develop regional values in several ways, such as helping to support the economy by serving as a source of attracting tourism which strengthens the local business market and has an impact on social standards (Getz et al., 2017). Tourists from other countries visiting the destination to celebrate festivals significantly affect the economy in the short term. They waste their money on regional goods to support fast business and, in the long run, growing job creation opportunities, such as the need for guides to provide better management (Lundberg et al., 2017).

The events also impose many significant impacts on the environment, usually adverse effects from activities such as increasing the use of transportation, energy, and construction. All factors combined cause climate change and resulted in a reduction of natural resources. The impact on the environment is from all over the states of festival preparation from beginning to end events. The waste generates from festival increase several kinds of pollution, such as dumping of waste into water bodies increase water pollution. The waste can be minimized by using biodegradable products instead of plastics, such as making flowers from plastic or using natural flowers. Early planning of events by keeping all eco-friendly environmental decisions in mind can significantly reduce negative impacts on the environment (BS & Koti, 2017). Festivals have many implications on social, environmental, and economic aspects. Festivals serve as a prominent source for building a strong economy, establishing high standards of society, and could prove themselves beneficial for the environment if planned sufficiently.

Overview of Cultural and Art Event in Hong Kong and in Other Countries

It is crucial to focus on Hong Kong as one of the most important cultural centers in the world. The exciting and lively city of Hong Kong initiated the journey as a trading port, then fought for their rights under British and Chinese rule. Currently, in the 21st century, it has developed swiftly and is considered the hub of financial and commercial centers of the world. Hong Kong city, along with its outstanding and unique past, is enriched with the beauty of multiple cultures and lifestyles. The heterogeneity of cultures makes it more attractive, magical, and famous worldwide. The culture of Hong Kong is highly diverse and eye-catching (Chiu & Siu, 2022).

Cultural events typically aid in the promotion of place value as well as the development of regional values in a variety of ways, including assisting the economy by serving as a source of drawing visitors to a strong local business market, as well as having an impact on social standards (Getz et al., 2017). The cultural festivals celebrated in Hong Kong usually include street parades, lighted temples, and unique exploration of dancing and musical performance. The city is filled with arsenals of the cultural festival which enhance the beauty of Hong Kong. The celebrations are celebrated every month of the Gregorian calendar.

Festivals of Buddhists and Taoists appear to celebrate according to the lunar calendar, which concludes that dates shift annually. One of the great festivals often rejoices in January, February, May, and October. Chinese New Year is a great significance and valuable festival in Hong Kong. People get three days holiday from work and enjoy unique and ancient customs on this day (Li & Yu, 2022).

The arts festival society organizes the art festival in Hong Kong in Hong Kong. It is one of the international festivals enriched with cultural values presented by multiple local and international artists related to all categories of arts, along with a vast range of Festival PLUS and educational events. The genres of art festivals include music, chamber opera, theatre, and many other successful performances in Hong Kong (Boyle et al., 2012). Due to the wide variety of festival cultures, this city is known as a cultural melting pot. It is a city of almost seven million people from various cultural backgrounds and has unique values. Many people are of Chinese origin, while others are Indonesian, Thai, Filipino, American, Canadian, British, and Australian. The diverse range of ethnic groups makes this city unique and ideal to live in and comes under the category of the most densely populated cities in the world (Chan, 2022).

Some of the most prominent cultural events include the following. Firstly. The Chinese New Year is a big celebration in Hong Kong. During this event, the people use red shock lanterns to cover the entire city, and it remains impossible to escape the city. Whereas most people are found praying for good fortune and good health, others are observed selling incense and flowers. The second most prominent event is the Clockenflap, where a music fest is arranged. It is one of the biggest music festivals and has grown in profile over the past few years. It organizes performances from English and Chinese pop stars (Lundberg et al., 2017). The Hong Kong Pride Parade is another annual event where the people of Hong Kong march against the hostility being faced by the LGBTQ+ Community.

It has also evolved into celebrating a culture of equality and love to help the LGBTQ+ community feel empowered. The Pride Parade of 2019 was observed to have above 10,000 people who marched throughout the cities. Another important festival is the Lantern Festival of Hong Kong, which marks the final day of the traditional Chinese New Year (Li & Yu, 2022). It remains to be one of the earliest festivals in Hong Kong.

It is significant to highlight a few prominent occasions that have occurred in other parts of the world. Festivals in Spain are unique events, analogs of which are not found in any other country. The programs richness and the events colorfulness attract tourists from all parts of Europe (Heller, 2019). Tomatina, known in Spain as the festival, is one of the most popular and visited Spanish festivals, which gained worldwide fame. The Tomatina festival occurs in the city of Bunyol in the province of Valencia. It is the largest tomato festival in Spain, during which more than 150 tons of tomatoes are transformed into juice, flooding the city streets and staining every event participant (Heller, 2019, p. 129).This holiday in Spain has received such wide publicity that today this red beating is being held in several cities of the world at once, which have borrowed the idea of the tomato battle from Spain (Heller, 2019). These include the Chinese city of Guangdong Province and the Colombian municipality of Sutamarchan.

Another trendy holiday is the carnival in Rio de Janerio, which is recognized all over the world. Every year, 40 days before Easter, a substantial rousing spectacle begins, which runs for 5 days (Heller, 2019, p. 130). Millions of Brazilians and foreigners from all over the world enjoy the extravagance of the carnival. The roads are overfilled with music, dancing, and colorful parades during the festival. Music plays a vital role in the carnival; bright lights are accompanied by dancers performing to the rhythmic sounds of the samba. The attraction of the celebration in Rio de Janeiro is the parade on the Sambodrome, a stadium specially built for the purpose. For several months, samba schools in Rio de Janeiro prepare their shows, with anywhere from 2,500 to 5,000 participants (Heller, 2019, p. 130). Each school has its theme, embodied in more minor details, including exotic handmade costumes. The parades begin in the evening and end only in the early morning. Tourists from around the world visit not just to observe but to take participate in the carnival.

Chapter Summary

This chapter reflects the significance of cultural and artistic events in Hong Kong and provides insight into the governments steps to improve cultural festival customs. At the same time, considerable attention is devoted to other cultural events that are popular worldwide. The cities of Hong Kong, Rio de Janeiro, and Bunyol are filled with a fusion of different cultures and traditions, and they have inherited other cultural practices. Events revolve around culture and art on a particular theme and create many socio-economic and environmental outcomes. Moreover, public authorities support festivals, carnivals, and celebrations that enhance the image of states and disseminate positive information about them. Cultural events promote heterogeneous culture and provide many opportunities to develop latent and inner talents in the arts and creativity. These events also facilitate the creation of a strong economy because of tourists. Thus, tourism increases the charm and beauty of festivals and enhances their value.

Methodology

Research Methods

Research methods are the techniques, approaches, and processes used to collect data and evidence to analyze the research, determine the findings, and demonstrate an understanding of the research audiences theme. There are several research methods that the researcher selects as the tool or instrument of data collection (Busetto et al., 2022). Research methods include research philosophy and an integrated approach with the philosophy of collecting, analyzing, and interpreting data. The current study has selected Qualitative research methods for the research analysis, the inductive approach, and interpretivism philosophy. As identified by Kumar (2019), there are four research philosophies: interpretivism, pragmatism, positivism, and realism. A major underline of the pragmatism philosophy is that the knowledge acquired by one is always based on ones experiences. Therefore, one way of reasoning is based on the experience of the author, which is

Abstract

The paper is a concise review of the module on new venture creation. Almost every aspect that is required of an entrepreneur is covered in this module and also mentioned in the paper. Diverse subject areas like new venture start-up risk, funding and financing of new ventures, business plans for a new venture, concepts like harvest goal and models that help in decision making have been covered here. Many small and medium ventures are started by individual or families. In such a scenario, the problems found in family owned ventures and the ways in which they can be solved have also been covered. The mindsets and methods model of entrepreneurship is an example of such a model. The concept of franchising and its backbone, the service delivery system is also a part of this paper. The layout of this paper has been done on the same model as the topics were learnt, week by week. This is only a brief description and review of the whole module, since what has been learnt in the past several weeks is very large for a full depiction. This module is ideal for businessmen, prospective and current managers and those who are planning to start new ventures.

Introduction

The past seven weeks of the module on entrepreneurship and starting new ventures has been an extremely useful session. It has been doubly advantageous because I am a reasonably successful entrepreneur myself (as the owner and managing director of Thai Lay Fashion Company). The information and education gained from this module will help to improve my business and help me in fine-tuning many aspects and processes in the business. This paper is an attempt to present all that has been learnt in the module in a concise and coherent form. All the main topics that have been covered will be briefly mentioned in the introduction before moving on to the main body of the work. The usual housekeeping details as mentioned in the assignment will be given at the end of the paper just before the conclusion. The initial chapters were concerned with the concept of economic and personal freedom which is one of the main reasons why people become entrepreneurs. A case study of a person called Kurt Bauer was also reviewed. A marketing plan for an organization with regard to the issues of starting a venture was also done. The difference between an idea and an opportunity, and how entrepreneurs use the business plan process to identify the best team members, director, and value-added investors was also studied. The importance of factors other than finance was also discussed. Another interesting section was the difference between and entrepreneur and an administrator. The concept of employee motivation, and rewards was also very informative and useful. Next section was about the role of the top management and mangers with regard to employee recruitment and retention. Proper care and effort should be taken by a new entrepreneur while in the act of a new venture creation. The topic related to that was the due diligence and evaluation process required by potential investors. The different sources of finance that is available to an entrepreneur in the process of venture creation came next. Financing was studied in depth in the next chapter with regard to debt and equity financing. Franchising is an import and popular way of doing business. The most important part of the franchise process is the creation of a service delivery system. This was what was studied next. The concept of harvest goad was studied as the second last chapter in the module. The last module was in fact in the form of an interview. It was with regard to problems faced by family owned businesses and an analysis of the interviewees business with the Mindset and Methods model was done. The whole module will be given in a concise form in the coming sections. Real life examples with references to the topics covered will be given wherever possible. It is to be noted that the examples will focus mostly on small and medium businesses since the topic is related to that concept.

Week 1

The Entrepreneurial Mind & Process

The following definition though long clearly states what entrepreneurship is all about. It is the dynamic process of creating incremental wealth. The wealth is created by individuals who assume the major risks in terms of equity, time and/or career commitment or provide value for some product or service. The product or service may or may not be new or unique, but value must somehow be infused by the entrepreneur by receiving and locating the necessary skills and resources. (Hisrich, Peters and Shepherd 2004, p.8). This will replace the need for a long winded explanation about the concept. A person who engages in the above activities is an entrepreneur.

Steps to lessen failure and increase chance of success: Even though failure rates of new businesses are quite high, the following steps can be followed so that chances of success will be increased.

Adequate capital: One of the most important things that a start-up should ensure is to have adequate capital (including working capital). Capital can be obtained though financial institutions like banks, angel investors or though the concept of venture capital (VC). Each financial institution will have their own policies on providing loans depending on the type of business, the reputation of the businessman, the security he can provide etc. Angel investors are individuals who invest in businesses looking for a higher return than they would see from more traditional investments. (Angel Investors. 2008). Most have their own criteria for providing finance and will usually insist on a board position and the right to provide consultancy to the start-up venture. Venture capital is the least risky way to start a business.

Match between Capital and the Opportunity: Every idea and opportunity needs a certain amount of capital to be successful. So, plan according to your capital available. The opportunity itself should be studied thoroughly for its feasibility.

Other factors: Other factors that contribute towards the success of a new venture include understanding the competition, competent employees, and the ability to conduct the day to day running of the business.

Normative Case Method

Decision making is an important and often crucial function of an entrepreneur. He or she will be faced with situations that may seem difficult to understand and come to conclusion. One of the methods to overcome this is to use what is known as the normative method of analysing given situations. A graphical representation of the analysis process is given below. This section will be the analysis of a given case study using the normative analysis method.

Normative approach aims at finding out not only how things are, but above all how they should be, which means that it will be necessary to define the subjective point of view that shall be used, in other words to select the people who shall evaluate the proposals which aim at improving the object of study. (Routioo 2007).

Kurt Bauer case study:

Kurt Bauer is a young business graduate who has two options, one becoming a businessman partnering with his brother and a few other associates and the other to work under a businessman called Ludwig (salary, commission and a possible future partnership). The mindset of the man presented in the picture is that he has dreams of becoming a big businessman. The problem for Kurt is which option to choose here. He can go and work under Ludwig in the future hope of getting a full partnership and he can start a venture on his own. The problem (defined) is that both cannot be done simultaneously without negatively affecting the outcome of the two options. This is not a major issue and Kurt will most probably opt for the second option. The main problem is that nearly half of new business ventures fail to succeed and Kurt is about to start one on his own. The solution is that Kurt should go into business on his own with financial help from his venture capitalist uncle and his brother. Alternative solutions include availing the services of a professional venture capitalist, taking a loan, or getting capital from angel investors. As for the decision on the issue, Kurt should get collateral from his uncle (instead of a loan) and use it to get capital from a bank or similar institution. He can release the collateral once the loan has been repaid or he has enough assets on his own.

Venture Capital and angel investors in Hong Kong

Hong Kong has a vibrant international trade and business history and its venture capital industry is very strong. Hong Kong is the largest venture capital centre in Asia, having the second largest concentration of venture capital professionals in the region and managing 32% of the total capital pool in the region. (Hong Kong Venture Capital Sector. 2009). The region has a strong association for the protection of venture capitalists called the Hong Kong Venture Capital and Private Equity Association (HKVCA). It was formed in 1987 with the primary objective of having an organized body to provide such capital and also for protecting the interests of venture capitalists and private equity financing companies in the country. The region also has an organization for connecting potential new venture entrepreneurs to angel investors and funds under the name of Hong Kong Angel Capital Network (HKACN).

Week 2

Difference between an Idea and an Opportunity

An opportunity is differentiated from an idea in terms of its marketing possibilities. All opportunities are exploitable for business growth and customer acceptance. Opportunity is profitable for business. But all business ideas are not marketable or profitable for the business firm. Before undertaking an opportunity as a business, the needs and demands of targeted customer group has to be identified properly. For modifying the opportunity as a business way, the personal skills of entrepreneurs have to be applied on it. (What is the Difference Between a Business Idea and an Opportunity. 2009). An idea is a thought that lacks action and potential for profit. An opportunity, on the other hand, is an idea that can be executed, at a profit, within an undetermined period of time (a window of opportunity). (Steward 2008).

For converting an idea in to an opportunity, judgment of the created ideas have to be done quickly by using the Venture opportunity screening Exercises (VOSE). The concept is explained below. An idea occupying money making characteristics are considered as opportunity. Only few of the ideas are advantages for business through customer attraction and profitability. After undertaking an idea as an opportunity for the business, entrepreneurs has to take steps to shape the opportunity. For this the needs and objectives of the business concern have to be analyzed. The cost effectiveness of particular idea comparing with its alternatives also has to be considered. The selection criteria for an opportunity must be in terms of major benefits, market possibility and potential business strengths supplied by each opportunity. (Chapter 5: The Opportunity, p.3). (Chapter 5: The Opportunity, p.2). For shaping an idea into an opportunity, a thorough research on the market characteristics has o be carried out by the entrepreneurs. Analysis of competitors will provide an overview about the potential strength and competency of the firm with regard to its competitors. (Chapter 4: Shaping your Opportunity, The opportunity, Creating shaping, recognizing, Seizing, p.139).

How Can the Entrepreneurs Use the Business Plan Process to Identify the Best Team Members, Director and Value Added Investors?

A business plan is the written description of the future of a business. It is a tool for entrepreneurs to realise their business goals. Entrepreneurs can use the business plan for coordinating the human resource personnel towards the business goals. Managers can be directed properly through well prepared business plans. Investment seeking entrepreneurs can use the business plan for transmission of their vision to potential investors. Potential investors can be attracted to the business with proper business plan. A Business Plan is the foundation, or rather a springboard, towards the establishment and growth of a new business, particularly in the later stages of growth. A business plan is an essential tool for companies raising capital. (The Importance of a Business Plan. 2008). A Business plan is the guideline for managing the business in profitable ways. The business plan should explore business goals and strategies to all persons engaged in the business operations and the ways for achieving them. This will provide competitive strength for the firm. (An Introduction To Business Plans. 2009). At the time of selection process of staff personnel, business plan will act as a basis for setting up of selection criteria. Thus best team members suitable to the business objectives can be selected. It explains the purpose of the organization. By establishing vision in the business plan it can persuade others to contribute for achieving the vision. Business plan can be used as yardstick for measuring the operational performance of employees and managers.

Real life examples

There are many examples of success storied that started from and idea which became an opportunity and eventually a business success. Such corporations have now become multinational companies. But the example given here is not very well known outside of Hong Kong. It also shows that any person can succeed in the region and need not be born here. The founder of the Lan Kwai Group is actually a German by the name of Allan Zeman. He had an idea to start a western style restaurant in a relatively small street called Lan Kwai Fong (the name adopted by his company as well). The ideas became a success and eventually he bought the whole street which became a cultural hotspot for tourists and locals alike. His idea developed into real estate and is now known in Hong Kong as Mr. Lan Kwai Fong. Later, in 2004, Zeman became chairman of Ocean Park, an amusement park which is now out performing and thriving against the struggling Hong Kong Disneyland. (Cole 2008).

Week 3

Money is the Least Important Part of the Resource Equation

Even though finance is an important part of the business process and new venture creation, there are other factors, that are equally or more important. The potential value of a business unit can be analysed using the Timmons model

The Timmons Model: The Timmons model of the entrepreneurship process provides a framework for identifying and evaluating venture potential. It helps determine the viability of new business model and emphasizes rigor in opportunity assessment. (Minniti 2007, p.12).

Entrepreneur requires various resources such as human resources including top professionals, finance, physical assets, and a business plan. Money is the least important part of the resource equation because starting of a new business requires entrepreneurs ability to take risks as well as abilities to overcome all challenges towards objective of the business. Financial factor comes only as the least important factor for the entrepreneur. Mill (1984) suggested that Risk taking is a key factor in distinguishing entrepreneurs from managers. It is believed that entrepreneurs take greater degree of risk especially in areas where they have control or competencies in realizing the profit. (Che, Naresh and Li 2006, p.1).

Utilization of professionals is a crucial decision process. Entrepreneur needs to look into whether the services of professionals and other important factors such as technical know-how, expertise in the field etc. are essential or not. Alternative solution can be used without appointing professionals which will help to reduce much cost and effort. Competency is one of most crucial factors to ensure the success of new business ventures. (Che, Naresh and Li 2006, p.5).

Week 4

Difference between an entrepreneurial manager and an administrator?

Even though it may sound similar, the manager and entrepreneur are two different characters and needs different skills and capabilities in each case.

Differences: The primary difference between an entrepreneur and administrator is with regard to risk bearing and conflict management, both inside and outside the organisation. While an entrepreneur manager has material stakes and investments in the business, an administrator is staff personnel who delegates work to employees and supervises their performance. Entrepreneurs are always thinking of ways to make money for themselves and create a successful business, while managers only consider working for others. (McSnackins 2008, p.4).

A manager is concerned with dayto-day activities of the business enterprise, and is accountable for persons working under him. Thus, the main difference between entrepreneurial managers is that there is need to assess what needs to be done for the corporate, and the manager determines how this could be performed, or achieved. Thus the main area would be policy making and procedural for entrepreneurial, while for administrators, it would be practically executing them. The main areas in which there are perceived differences between entrepreneurial managers and administrators could be seen in terms of the following. An entrepreneur has to be competitively oriented while an administrator had to be an expert in day to day administration. The former should always look for opportunities, whereas as for an administrator, this will be considered to be a quality rather than a necessity. An entrepreneur is an investor and employer while an administrator is an employee. An administrator is only responsible for the area in which he controls whereas an entrepreneur has to have full control and responsibility of the entire organization. It is seen that ethical values also play an important role in entrepreneurship and sometimes short term gains have to be foregone for long term profits and objectives. What is ethical is not always obvious; rather situations involving ethical issues are often ambiguous. (Timmons and Spinelli, p. 326). However, administrators are not under such kind of pressures or stresses, and only needs to perform assigned tasks determined by the management.

Real life examples

A job opening (in Hong Kong) for an administrator describes the responsibilities (or duties) for that post. They include general accounting duties and charge of general office administration. (Japanese Speaking Accountant and Admin. 2008). The person also has to have three years experience in the above mentioned duties. This is in agreement with what has been said above. Entrepreneurial characteristics are common everywhere whether it is in Hong Kong or any other part of the world. The case of Mr Thomas Tso, is an ideal example of a businessman who had ideas, saw an opportunity, and was willing to take the risk. One of the keys to business success for Thomas Tso is to never look back. When he arrived in Canada from Hong Kong in June of 1990 he had a business plan. There were challenges ahead, but Mr. Tso was determined to succeed. As a result, he runs a successful automobile sales and service dealership with plans for significant expansion. (Tso).

4.2. Employee Motivation and reward: Employee motivation can be defined as the the level of energy, commitment, and creativity that a companys workers bring to their jobs. (Legal Definition: Employee Motivation Law and Legal Definition. 2009). In order to maintain and increase the above factors, the employee will have to be motivated and rewarded. The first reaction about what motivates an employee would be that it is the monetary compensation received in exchange of work performed. Many theories and studies have proved that monetary compensation is only one of the factors that motivate employees. According to the book Employee Reward, the following factors will have to be taken into consideration when trying to motivate and reward employees. They include satisfaction of individual (employee) needs, specific and challenging goals to work for, and the individual expectations of reward by the employee. Other important factors are fairness, equity, and consistency. Motivation strategies should incorporate all the elements referred to above. (Armstrong 2002, p.66).

The different theories and studies on motivation is testimony to this fact. They include Douglas McGregor (theory y), Frederick Herzberg (two factor motivation hygiene theory,) Abraham Maslow (theory z, hierarchy of needs), Elton Mayo (Hawthorne Experiments) Chris Argyris Rensis Likert and David McClelland (achievement motivation). (Employee Motivation: Theory and Practice. 2008).

Motivation can be extrinsic (tangible) and intrinsic (intangible).

Motivation is a challenging task. Setting a reward system is equally challenging and efforts to make it perfect by providing proper job descriptions, setting up performance standards and benchmarks, proper monitoring and periodic reviews and changes (to the reward system) when needed is required.

Recruiting and retaining of employees

It is often said that employees are the most important assets of an organization. It is the quality and ability of the employee, along with the capability and leadership shown by the top management of the company that ultimately results in its growth and success. The employee factor is especially true in the case of a new or start-up business. The employees, in close association with the management have to play a crucial role to attracting, retaining and growing its customer base. The top management of the company has to play an extremely crucial role at this juncture of entry. They have the huge responsibility of recruiting the senior, middle, lower level managers, supervisors and entry level employees of the firm. They can resort to many established and accepted ways of doing this. The most common ways are advertising in the print and visual media, taking employees from other companies, using networking or availing the services of a professional staffing agency. In the case of senior level management it would be ideal to use networking contacts established from sources like friends, business associates, auditors, venture capitalists, and other associates. An advantage is that the costs involved in paying fees of a staffing agency or paying for advertising space can be saved. Advertising for jobs is useful for attracting a large number of applicants and it can benefit the company by having a large pool of talent to select from. (Recruitment Methods. 2002).

Advertising can be done in classifieds and trade journals which will less costly and more effective. But this form of attracting talent can be quite expensive and wasteful. Cost of advertising will depend on the media and the publication in which the advertisement is given. It can be wasteful because the ad might not be visible or it might attract the wrong types of potential employees. Another effective but costly option would be to use the services of a professional staffing agency. The recruitment process involves sending interview dates, preliminary interview, short-listing, second and final interview and sending letter of acceptance. A contract along with a job description will have to be prepared for signing.

Real life examples

Intel is a very well known, respected and probably the largest processor manufacturer in the world. The Hong Kong division has implemented a lot of employee benefits to motivate and retain their employees. According to the company website, Intels benefits plans are designed to keep employeesour most important assethealthy and productive. Our benefits are generous and personalized, in many cases letting employees choose the options that are right for themselves and their family. (Our Greatest Investment is Our People: Hong Kong). They include medical benefits, maternity benefits, pension programs, life and accident insurance, paid leave, professional counseling for employees and their dependents etc.

Week 5

This section deals with the actual creation of a new venture and includes topics like due diligence and funding of an enterprise.

• Due diligence: Diligence can be defined as conscientiousness in paying proper attention to a task; giving the degree of care required in a given situation. (Diligence (noun). The word due is added to reinforce the amount of care that should be taken while starting a new venture. The entrepreneur, as earliest investor, should pursue due diligence on their idea early and often. This due diligence precedes the decision to invest more time and money in their venture and involves attempting to identify and resolve the most critical uncertainties (unknowns) surrounding the new venture. (Due Diligence).
• They include factors like whether the project will work out, whether the entrepreneur can manage it, whether there will be a market for the products, and whether the team is capable. Three components for the basis of a new venture and several questions should be raised and answered for each of the components. The components are the market, the technology and the new venture (business).
• Venture evaluation: It is not surprising that potential customers will conduct an evaluation process before investing in the business. A VCs decision to invest in a specific venture is more than an evaluation of a given ventures business model; it also takes into account the NVT members and numerous other criteria. (Busenitz, Fiet and Moesel 2005).

VC stands for venture capitalists and NVT stands for new venture team. A study about venture evaluation processes confirms that relatively consistent evaluation criteria are applied across the industry and corroborates previous models which suggest that the venture capitalists decision-making consists of several stages. (Boocock and Woods, 1997).

The criteria include factors like level of innovation, need (demand) for the product and value to the customer, the profit margin of the product, production capability, product life cycle, and the level of capital needed to satisfy the above criteria. The most important criteria probably will be the perception of the investors in the ability of the entrepreneur in successfully developing the business.

Sources of finance for the new venture

There are many ways in which a new venture can be funded. They include, debt and equity financing, venture capital funding, funds from friends and relatives, and angel investors. In the paper related to the week (submitted earlier as a part of weekly assignments) the choice of funding was a balance between debt and equity funding. However, for the purpose of this study, it is proposed to confine to mezzanine financing requirement for software industry that deals high end customized software solutions on a global level.

This option is believed to provide access to large equity base that could sustain the company in future years and also provide impetus to further investment proposals in future for demanding software business needs and future diversification plans

• Pros and cons of equity funding: The main advantages, or benefits of equity funding are as follows. There is non dependence on loan or debt capital that is more risky in terms of mandatory interest payments and other costs. This is because as debt, the interest is payable on regular basis and the payment must be repaid, if not converted into equity.  (Timmons and Spinelli 2007, p. 425).

Dividend payments to shareholders would be at the discretion of the Board of Directors and, in the event of deferred payments, could be a source of corporate savings for future use. A broader and diversified capital base is ensured, providing motility and spread to fund movements. The public image of the company is build, especially in a competitive market, and third parties have greater confidence in dealing with them. There are certain disadvantages also. There is greater degree of legal and financial accountability is forthcoming in public limited companies. Strict Companies Registration Office compliances and tighter regulatory framework would be in force. This could prove very cumbersome for newly started companies with little professional experience or expertise in these areas of public accountability.

Real Life examples

The concept of due diligence was practiced in the case of a new start-up dotcom company called HarQen LLC. In this case due diligence was taken by one of the cofounders Lauren Flanagan, as well as venture capitalists. Both of them found the venture very promising after inspection and agreed to fund the venture. That due diligence got Flanagan interested in the technology. She told the company she was interested in investing if it would agree to move beyond comedy. (Gallagher 2008).

Week 6

Franchising

Franchising is one of the most sought after ways of doing business in the world today. It has become so popular that this concept is being tried out in many avenues of business. The most crucial component in franchising is the service delivery system which practically forms the backbone of the concept.

Service delivery system in franchising: According to Francorp, a leading franchise consulting and development firm, the key is that you start with an exceptionally sound baseline service delivery system. (Conner 2008).

There is more literature written about the importance of an SDS. According to the book Franchising, an SDS is the fundamental means by which the customer satisfaction in a franchising business is assured and also created a competitive advantage for the franchisees. Every franchise has a well defined SDS, however overt or transparent it may seem to an outside observer. (Spinelli, Rosenberg and Birley 2004, p.20). A well laid our service delivery system has the following advantages. It Encapsulates the intellectual knowledge of the franchise as a business asset. Written instructions which add value to a business process are leased to third parties to generate a profit. (Preparing the Franchise Package: Understanding the Business System, p.6).

Evaluation of an SDS

The importance of the SDS has been established and now the review of a sound system is being done here. This can be done on the basis of procedures followed in the evaluation of a general service delivery system and its quality. This will be done on the basis of a study conducted on the effectiveness of fast food franchise outlets in the USA and Korea. The study included the following variables commonly referred to as SERVQUAL, which is a common yardstick to measure service quality. The variables are tangibleness, reliability, responsiveness, assurance, and empathy. An SDS should assure that tangible factors like physical facilities, equipment, personnel, and communication materials. (Chang, Lim and Kim, p.1230). Reliability of tasks and operations should be there to ensure quality. Responsiveness or the willingness of the staff to be of service to customers and to meet their requirements is another important factor. Employee should be made knowledgeable, courteous and should be able to impart a feeling of trust and confidence in customers. Also an element of empathy rather than sympathy should be taught to the employees in dealing with customers. The