Is Export oriented industrialization indispensable for economic growth

Is Export oriented industrialization indispensable for economic growth INTRODUCTION One of the key indicators, of economic development of a country, is its level of industrialization. That is, as many empirical investigations proved the main reason for increased divergence in living standards between the advanced countries and the developing countries is their level of industrialization. This being the fact, it is only after decolonization and end of world War II that, developing countries consciously adopted industrialization strategies for economic development purposes and as a solution, from their vulnerable dependence on export of few primary products and import of high valued manufactured goods (Brisbane, 1980). The low terms of trade in international market for primary goods from former colonies and the determination to get out of severe poverty and register sustained growth, were the main reasons for the diversification of the narrow structure of the colonial economy. Industrialization is beneficial for developing countries for many reasons including the following (i) it reduces their vulnerable dependence; (ii) it speeds up their economic growth process; (iii) it modernize the economy through spill over or externalities effects associated with industrialization, from advanced countries; (iv) create more employment for the vast population in rural agricultural sector and accelerate income growth which is used as a means to re-distribute income to the impoverished masses; and (v) generate more foreign currency through export which reduces balance of payment problems (Brisbane, 1980). As Brisbane explained, to industrialize, developing countries adopted import substitution strategies from about 1945 to the 1970s. Import substitution strategy is designed to produce few luxury consumer goods for domestic consumption behind a very high tariff wall. However, most countries which followed the import substitution strategy failed, to meet the goal of industrialization, while spectacular growth and development was reported from developing countries that pursued an export oriented strategy, in the 1970s. Defined simply, export-oriented Industrialization (EOI) often termed as export led industrialization (ELI) is a policy designed for the purpose of speeding up the industrialization process of a country through exporting goods for which the nation has a comparative advantage. This policy requires countries to open up their domestic market to foreign competition in return to getting access to international market. In order to promote EOI and ultimately economic development, complementary policies in relation to tariffs, trade, exchange rate, and others need to be adopted and employed. This paper will critically examine how export oriented industrialization is essential for economic growth in developing countries, if it can be backed up by appropriate policies on trade, industrial policy and exchange rate policy, geared for that purpose. The paper also argues that export oriented industrialization has its own drawbacks. Thus, the essay is structured as follows: In section 2, It the paper analyses the significance of policies on the functioning of EOI, particularly: trade policy, industrial policy and exchange rate policy that developing countries need to adopt and identifies areas where government intervention is needed to bring economic development. It then explains the drawbacks of export oriented industrialization, on export dependence countries, in Section 3. Then section 4, empirically examines how EOI contributes to economic development and the conclusions are presented in section 5. 2. Significance of Policies on EOI The role of complementary policies for effectiveness of export oriented industrialization is undeniable. This paper focuses mainly on how trade, industrial and exchange rate policies can support EOI policy. 2.1 Trade policy: Appropriate trade policy is one of the key tools used for effective of export oriented industrialization and for economic development, in general. That is, the better trade policy a country has, the better chance it has for industrial diversification, creating value added products and getting more income from export. Theoretical context: Even if, there has been little consensus on the relationship between trade and short- to medium -term economic growth-and even less on its role in long term economic development. The principle of comparative advantage, which prescribe countries to specialize as to their factor endowment, first described by David Ricardo, forms the theoretical basis for traditional trade theory and provides the rationale for free trade. The principle states that even if a country produced all goods more cheaply than other countries, it would benefit by specializing in the export of its relatively cheapest good (or the good in which it has a comparative advantage)(Murray Gibbs 2007, p. 10). And some classical economists believed that the principal base for this principle is the difference in factor endowments among countries determine the relative cost of production. However, this traditional theory from classical economists has been challenged as it doesnt explain well the actual trade patterns and as the theory has unrealistic assumptions, like perfect competition, full employment etc (Murray Gibbs 2007). In addition to the unrealistic assumptions, in real situations the theory favors advanced countries, and developing countries hardly benefit anything from it. The controversial Singer Prebisch thesis, also explained this situation by stating that it is the center that gets all the benefits of international trade while the periphery gets nothing, which opposes to the Ricardian Theory of Comparative Advantage. He argued: given the differences in the existing economic, productive and labor market structures between the periphery and the center (in the application of technology in traded goods and in the market structures; oligopoly vs. competitive) less-developed countries cannot benefit from international market, if they adopt comparative advan tage doctrine (Todaro and Smith 2009).This is because developing countries usually produce and export primary products which have lower terms of trade. And the scope for diversification is too narrow, and these conditions put developing countries to have vulnerable dependence on international market. Thus, unlike the classical economists static comparative advantage doctrine, dynamic comparative advantage is a better option for developing countries. This is because as more innovation, technology, capital, and other requirements for industrializations are met and as industrialization happens in developing countries, it will be easier to diversify their economic structure, as manufactured goods have better terms of trade than primary products. Skarstein (2007) in his paper Free Trade: A Dead End for Underdeveloped Economies,criticized the comparative advantage doctrine. He argued, what matters most in international trade is the absolute advantage that countries get out of it than a comparative advantage. And empirical evidences show that the doctrines of comparative advantage and free trade benefit the advanced countries only. This is mainly because the doctrines are likely to exclude international learning among countries. Particularly, the WTO agreement, Trade related intellectual property rights (TRIPS), which is a big challenge developing countries to acquire technology, skill and international learning from the rest of the world. He also argued, for a trade policy to function effectively, developing countries have to make sure that, this policy is well integrated with their industrial policy. And in addition to these, developing countries have to get support from advanced countries, through reduced import tariffs for goods from developing countries and by giving developing countries a chance to protect their industries and to get easy access to international market. He also stressed that, developing countries have to ensure that food security is maintained in their countries, as it keeps them safe from their foreign account, balance of payment problems as well. Thus, governments of developing countries have to protect agricultural production for consumption. Therefore, while designing policies, developing countries have to consider the dynamic comparative advantage or absolute advantage options. In addition to this, they also have to consider how their economic integration to the world economy should be in support of EOI. 2.2 Industrial policy: A proper industrial policy is also another important tool for effective export oriented industrialization, as a countrys industrialization depends on how individual domestic firms are protected. This is because, it is individual firms that innovate and harness technological change and compete in the world market (Suranovic, 2002). The basic policy component of industrial policy for developing countries is Infant industry protection. It is a necessary condition, because newly emerging firms in developing countries need some policy to help them grow strong and to safeguard them from intrusion of foreign firms in their market, that have a negative effect on their growth. Infant industries in developing countries can mainly be protected through import tariff mechanism, which reduce imports from the rest of the world and raises demand and production of domestic product. This protection enables the domestic firms to cover their higher production costs and to remain in business. Depending on the nature of the firm, infant industry protection strategy will help the domestic firms to produce efficiently and to be competent in international markets. However, in order to use the infant industry protection policy as a tool for export oriented industrialization, government of developing countries need to have reliable information about what industry to protect, how large the production tariffs need to be and over what period the tariffs will be reduced and eliminated. Because import tariffs have to be gradually reduced and eliminated, to increase efficiency of domestic firms. A complementary policy component to infant industry protection in export oriented industrialization is export promotion. This component stimulates export and allows the infant industry to have access to international market, while Infant industry protection policy allows the new domestic firm to grow strong. For industrial policy to be effective it has to be complemented by competition policy, as some regulations are required for the competition among domestic firms and simultaneously, as there is a need for policy to protect the domestic firms from intrusion of foreign firms in their market. A coherent execution of industrial policy requires a coordinated approach to trade policies. This is because trade policies are designed usually in accordance with a countrys trade negotiations, which include: policies related to investment, tariff, Intellectual property, and others. The effectiveness of tariffs as a tool for industrialization is also linked to the monetary policy framework within which it operates. When the capital account is liberalized control over exchange rates may be lost and the appreciation of exchange rates can obviously undermine export competitiveness and the impact of tariff protection (Murray Gibbs 2007, p. 19). 2.3. Exchange rate policy: The role of exchange rate policy in the success of export oriented industrialization strategy is undeniable. Exchange rate is a policy on the level of exchange rate of a countrys currency. The main challenge in formulating the exchange rate policy is in keeping balance between maintaining exchange rate stability and maintaining export price competitiveness, which requires devaluation. Devaluation increases the value of imports, while it gives options for exporters to choose either to reduce the prices of their products or to keep them as they are, to increase their profit margin. Thus, devaluation, at a cost of higher inflation, enables domestic industries to be competent internationally, by keeping the volume of import down and by raising the volume of export (domestic output) higher. The role of government in controlling inflation, to stabilize the economy is very essential, here. Thus, this phenomenon in addition to supporting the export oriented industrialization process it helps countries to improve their current account balance in Balance of payment problem (Jacob, Atta ; Keith R., Jefferis ; Ita, Mannathoko and Pelani, Siwawa-Ndai 2000) 3. Drawbacks of Export dependence A country is dependent on export, if export constitutes the largest portion of its gross domestic products. However, even if EOI strategy contributes for economic development, the extent to which this strategy is applied has to be considered for various reasons. To mention some of them, as dependency theorists argue: first, export dependent developing countries cause chaos on the long-term economic planning capacity of a nation-state (Barratt-Brown Prebisch) as these countries have little or no control over the market, to allow sustained economic growth through stable revenue. Second, Income from export is not a reliable source for economic development for developing countries. As many of the export oriented industrializations in these countries are owned by multinational corporations, and large portion of revenue from such sources are not repatriated, to be used for re-investment (Jaffee, 1985). 4. Empirical evidence: Skarstein, 2007 paper Free Trade: A Dead End for Underdeveloped Economies, showed the empirical evidences on EOIs contribution for miraculous economic development of the Asian tigers and the now developed countries. It mainly showed the relationship between economic development and effective implementation of infant industries protection policy and export promotion policy. In support of this, it is argued, that many people have argued that Infant industry protection was precisely the industrial development strategy that was pursued by countries like the US and Germany during their rapid industrial development before the turn of the 20th century. Both the US and Germany had high tariffs during their industrial revolution periods. These tariffs helped protect fledgling industries from competition with more efficient firms in Britain and may have been the necessary requirement to stimulate economic growth (Suranovic 2002) Bairoch also analyzed data and concluded that the different the effect of free trade on developed and developing countries is. In all the cases he analyzed, free trade has a positive effect on developed countries while it lets the least developed countries to suffer. He mentioned that United Kingdom registered its fastest growth during the period (1860 1880). In those cases he analyzed, how effective import tariffs for developing countries were in their economic development (Bairoch, 1972, p. 211). In his paper, Skarstein, illustrated, with detailed data how the East Asian tigers used industrialization policy for their economic development. That is: first by implementing a policy of protected import substitution and then, as their industries grow competent, by shifting their industrialization strategy to export oriented industrialization, with a slow reduction of import barriers for industrial good. And, at the same time, how implementing high import protection for their agriculture helped them to maintain food security and helped their success in industrialization The miraculous performance of the East and South East Asian countries during 1970s to 1990s cannot be analyzed without considering the connection between the export -oriented policies and economic growth. In the Newly Industrialized Economies from East and South East Asia, the general macroeconomic policies as well as selective export promotion policies facilitated the high export and economic growth. Following their path China and India also changed their policy stance in favor of export oriented policies and moved on the high growth trajectories. 5. Conclusions: In sum industrialization is a key process for developing countries for economic development. However, as many economists agree, the process of economic development is very complex, as it depends on large number of variables such as political system, socio economic structure, capital accumulation (both physical and human), trade, price fluctuations, and income distribution, and even more on geographical characteristics. As such, while export oriented industrialization contributes to economic growth, it is not necessarily indispensable to the growth and development of developing countries. As explained in this essay, EOI can be one of the key strategies to register economic growth. And in order for it to function effectively it has to be supported by appropriate components of the policy like: infant industry protection strategy, competition policy, export promotion strategy and others. More specifically, it requires well functioning and well integrated macroeconomic policies like: trade policy, industrial policy, exchange rate policy, investment policy, tariff policy and others. Government intervention also plays a key role in making the export oriented industrialization effective for economic development. Examined empirical evidences also reveal that Export-oriented Industrialization was particularly the characteristic of the economic development of the Asian Tigers: Hong Kong, South Korea, Taiwan and Singapore in the post World War II period . In addition to Asian Tigers, evidences also tell how EOI strategy contributed for the economic development of US, Germany and others, who are now in developed world category. However, though the role of export oriented industrialization in economic development is undeniable, countries have to also carefully consider its share in the gross domestic product, as larger export dependence has a negative effect on economic growth.

History of Motorcycles Essay

History Of Motorcycles And The Automobile Industries Marketing Essay Automobile is one of the largest industries in global market. Being the leader in product and process technologies in the manufacturing sector, it has been recognized as one of the drivers of economic growth. During the last decade, well directed efforts have been made to provide a new look to the automobile policy for realizing the sector’s full potential for the economy. Steps like abolition of licensing, removal of quantitative restrictions and initiatives to bring the policy framework in consonance with WTO requirements have set the industry in a progressive track. Removal of the restrictive environment has helped restructuring, and enabled industry to absorb new technologies, aligning itself with the global development and also to realize its potential in the country. The two-wheeler industry has been in existence in our country since 1955. Two-wheeler segment is one of the most important components of the automobile sector that has undergone significant changes due to shift in policy environment in India. The composition of the two-wheeler industry has witnessed sea changes in the postreform period. It consists of three segments viz. scooters, motorcycles and mopeds. India is the second largest producer and manufacturer of two-wheelers in the world. Indian two-wheeler industry has got spectacular growth in the last few years. Hero Honda, the ‘World No. 1’ two wheeler manufacturer for past 5 years in row is a joint venture between India’s Hero Group and Honda Motor Company, Japan has not only created the world’s single largest two wheeler company but also one of the most successful joint ventures worldwide. India is the second largest producer and manufacturer of two-wheelers in the world. Indian two-wheeler industry has got spectacular growth in the last few years. Indian two-wheeler industry had a small beginning in the early 50’s. The Automobile Products of India (API) started manufacturing scooters in the country. Bikes are a major segment of Indian two wheeler industry, the other two being scooters and mopeds. Indian companies are among the largest two-wheeler manufacturers in the world. Hero Honda and Bajaj Auto are two of the Indian companies that top the list of world companies manufacturing two-wheelers. The two-wheeler market was opened to foreign companies in the mid 1980s. The openness of Indian market to foreign companies lead to the arrival of new models of two-wheelers into India. Easy availability of loans from the banks, relatively low rate of interest and the discount of prices offered by the dealers and manufacturers lead to the increasing demand for two-wheeler vehicles in India. This lead to the strong growth of Indian automobile industry. The two-wheeler industry in India has grown rapidly in the country since the announcement of the process of liberalization in 1991 by the then finance minister Dr. Manmohan Singh, now Prime Minister of India. Previously, there were only a handful of two-wheeler models available in the country. Currently, India is the second largest producer of two-wheelers in the world. It stands next only to China and Japan in terms of the number of two wheelers produced and the sales of two-wheelers respectively. In the year 2005-2006, the annual production of two-wheelers in India stood at around 7600801 units. The trend of owning two-wheelers is due to a variety of facts peculiar to India. One of the chief factors is poor public transport in many parts of India. Additionally, two-wheelers offer a great deal of convenience and mobility for the Indian family. Hero Honda Motors Limited, based in Delhi, India, is the world’s largest manufacturer of motorcycles. Hero Honda is a joint venture that began in 1984 between the Hero Group of India and Honda of Japan. It has been the world’s biggest manufacturer of 2wheeled motorized vehicles since 2001, when it produced 1. 3 million motorbikes in a single year. Hero Honda’s Splendor is the world’s largest selling motorcycle. EVOLUTION OF TWO-WHEELER INDUSTRY IN INDIA Two-wheeler segment is one of the most important components of the automobile sector that has undergone significant changes due to shift in policy environment. The two-wheeler industry has been in existence in the country since 1955. It consists of three segments viz. scooters, motorcycles and mopeds. According to the figures published by SIAM, the share of two-wheelers in automobile sector in terms of units sold was about 80 per cent during 2003- ¬04. This high figure itself is suggestive of the importance of the sector. In the initial years, entry of firms, capacity expansion, choice of products including capacity mix and technology, all critical areas of functioning of an industry, were effectively controlled by the State machinery. The lapses in the system had invited fresh policy options that came into being in late sixties. Amongst these policies, Monopolies and Restrictive Trade Practices (MRTP) and Foreign Exchange Regulation Act (FERA) were aimed at regulating monopoly and foreign investment respectively. This controlling mechanism over the industry resulted in: (a) several firms operating below minimum scale of efficiency; (b) underutilization of capacity; and (c) usage of outdated technology. Recognition of the damaging effects of licensing and fettering policies led to initiation of reforms, which ultimately took a more prominent shape with the introduction of the New Economic Policy (NEP) in 1985. However, the major set of reforms was launched in the year 1991 in response to the major macroeconomic crisis faced by the economy. The industrial policies shifted from a regime of regulation and tight control to a more liberalized and competitive era. Two major results of policy changes during these years in two-wheeler industry were that the, weaker players died out giving way to the new entrants and superior products and a sizeable increase in number of brands entered the market that compelled the firms to compete on the basis of product attributes. Finally, the two- ¬wheeler industry in the country has been able to witness a proliferation of brands with introduction of new technology as well as increase in number of players. However, with various policy measures undertaken in order to increase the competition, though the degree of concentration has been lessened over time, deregulation of the industry has not really resulted in higher level of competition. A GROWTH PERSPECTIVE The composition of the two-wheeler industry has witnessed sea changes in the post-reform period. In 1991, the share of scooters was about 50 per cent of the total 2-wheeler demand in the Indian market. Motorcycle and moped had been experiencing almost equal level of shares in the total number of two wheelers. In 2003-04, the share of motorcycles increased to 78 per cent of the total two-wheelers while the shares of scooters and mopeds declined to the level of 16 and 6 per cent respectively. Different scenarios have been presented based on different assumptions regarding the demand drivers of the two-wheeler industry. The demand for mopeds is not presented in this analysis due to its already shrinking status compared to’ motorcycles and scooters. The high growth rate in motorcycle segment at present will stabilize after a certain point beyond which a condition of equilibrium will set the growth path. Another important thing to keep in mind while interpreting these growth rates is that the forecast could consider the trend till 1999 and the model could not capture the recent developments that have taken place in last few years . India is the second largest producer and manufacturer of two-wheelers in the world. Indian two-wheeler industry has got spectacular growth in the last few years. Indian two-wheeler industry had a small beginning in the early 50’s. The Automobile Products of India (API) started manufacturing scooters in the country. Bikes are a major segment of Indian two wheeler industry, the other two being scooters and mopeds. Indian companies are among the largest two-wheeler manufacturers in the world. Hero Honda and Bajaj Auto are two of the Indian companies that top the list of world companies manufacturing two-wheelers. The two-wheeler market was opened to foreign companies in the mid 1980s. The openness of Indian market to foreign companies lead to the arrival of new models of two-wheelers into India. Easy availability of loans from the banks, relatively low rate of interest and the discount of prices offered by the dealers and manufacturers lead to the increasing demand for two-wheeler vehicles in India. This lead to the strong growth of Indian automobile industry. HERO HONDA Hero Honda Motors Limited, based in Delhi, India, is the world’s largest manufacturer of motorcycles. Hero Honda is a joint venture that began in 1984 between the Hero Group of India and Honda of Japan. It has been the world’s biggest manufacturer of 2wheeled motorized vehicles since 2001, when it produced 1. 3 million motorbikes in a single year. During the 80s, Hero Honda became the first company in India to prove that it was possible to drive a vehicle without polluting the roads. The company introduced new generation motorcycles that set industry benchmarks for fuel thrift and low emission. A legendary ‘Fill it – Shut it – Forget it’ campaign captured the imagination of commuters across India, and Hero Honda sold millions of bikes purely on the commitment of increased mileage. Over 20 million Hero Honda two wheelers tread Indian roads today. These are almost as many as the number of people in Finland, Ireland and Sweden put together! Hero Honda has consistently grown at double digits since inception; and today, every second motorcycle sold in the country is a Hero Honda. Every 30 seconds, someone in India buys Hero Honda’s top -selling motorcycle – Splendor. This festive season, the company sold half a million two wheelers in a single month—a feat unparalleled in global automotive history. Hero Honda bikes currently roll out from its three globally benchmarked manufacturing facilities. Two of these are based at Dharuhera and Gurgaon in Haryana and the third state of the art manufacturing facility was inaugurated at Haridwar, Uttrakhand in April this year. These plants together are capable of producing out 4. 4 million units per year. Hero Honda’s extensive sales and service network now spans over 3000 customer touch points. These comprise a mix of dealerships, service and spare points, spare parts stockiest and authorized representatives of dealers located across different geographies. Hero Honda values its relationship with customers. Its unique CRM initiative – Hero Honda Passport Program, one of the largest programs of this kind in the world, has over 3 million members on its roster. The program has not only helped Hero Honda understand its customers and deliver value at different price points, but has also created a loyal community of brand ambassadors. Having reached an unassailable pole position in the Indian two wheeler market, Hero Honda is constantly working towards consolidating its position in the market place. The company believes that changing demographic profile of India, increasing urbanization and the empowerment of rural India will add millions of new families to the economic mainstream. This would provide the growth ballast that would sustain Hero Honda in the years to come. As Brijmohan Lall Munjal, the Chairman, Hero Honda Motors succinctly points out, â€Å"We pioneered India’s motorcycle industry, and it’s our responsibility now to take the industry to the next level. We’ll do all it takes to reach there. † WHICH SEGMENTS ARE BEING TARGETED AND NEED TO INFLUENCE THE TARGET MARKET? Geographic Segmentation calls for division of the market into different geographical units such as nations, states, regions, countries, cities, or neighborhoods. In the South Asian context, geographic segmentation assumes importance due to variations in consumer preferences and purchase habits across different regions, across different countries, and across different states in these countries. Demographic Segmentation In Demographic Segmentation, we divide the market into groups on the basis of variables such as age, family size, family life cycle, income, occupation, education, religion, race, generation, nationality and social class. One reason demographic variables are so popular with marketers in that they’re often associated with consumer needs and wants. Another is that they’re easy to measure. Psychographic Segmentation Psychographics is the science of using psychology and demographics to better understand consumers. In psychographic segmentation, buyers are divided into different groups on the basis of psychological/personality traits, lifestyle, or values. People within the same demographic group can exhibit very different psychographic profiles. Values and lifestyles significantly affect product and brand choice of consumers. Religion has a significant influence on values and lifestyles. Market Targeting: Effective Segmentation Criteria to be useful, market segments must rate favorably on five key criteria: 1. Measurable, the size, purchasing power and characteristics of the segments can be measured. 2. Substantial, The segments are large and profitable enough to serve. A segment should be the largest possible homogenous group worth going after with a tailored marketing program. It would not pay, for example, for an automobile manufacture to develop cars for people who are less four feet tall. 3. Accessible, The segments can be effectively reached and served. Differentiable, The segments are conceptually distinguishable and respond differently to different marketing-mix elements and programs. If married and unmarried women respond similarly to a sale on perfume, they do not constitute separate segments. Actionable, Effective programs can be formulated for attracting and serving the segments. Hero Honda is targeting at youth, Unicorn looked sportier than all the existing motorcycles in the premium segment and was pitted against Bajaj Pulsar, the leader with 75 percent market share in that segment. DIFFERENT PROMOTIONAL TOOLS USED AND THE STRATEGY BEING USING THESE TOOLS? Promotion: Above the line (ATL) is an advertising technique using mass media to promote brands. Major above-the-line techniques include TV and radio advertising, print advertising and internet banner ads. This type of communication is conventional in nature and is considered impersonal to customers. The ATL strategy makes use of current traditional media: television, newspapers, magazines, radio, outdoor, and internet. Hero Honda used Above the Line Promotion because in the Above the Line promotion co. members used advertisement through Radio, T. V. , Newspaper and Other media communications. Place: Geographical Placing: – Geographical placing of the product has divided into 4 markets and these are: 1. Local 2. National 3. Regional 4. International Hero Honda used National Market for sale the Hero Honda Splendor. Hero Honda is also planning an extensive marketing campaign with the launch, which would reflect the bike’s contemporary styling and advanced technology. The integrated marketing campaign for ZMR will include outdoor media, Web, mobile, ground activations, print and electronic media, said the company. Hero Honda Pleasure – â€Å"Why should boys have all the fun? † Isn’t that a must ride statement, that can tempt any girl to just buzz with the wind. The Hero Honda Pleasure is Hero Honda’s maiden venture into the burgeoning gear-less scooter market. The pleasure has schemed its strategies to be the best seller by concentrating much on the interest of young girls who love to rock the field of glamor, luxury and comfort. Eye catchy features: The Pleasure sports flashy colours, from Tahitian blue metallic, force silver to the ever trendy colour black. Multi-reflector headlight, body-coloured mirrors, multi-reflector indicators, trendy rear grip, modern tall light cluster, and a new age oval-shaped instrument panel all make the Pleasure a head-turner. For more comfort during the ride, the scooter is designed with broader seat that offers greater riding comfort. Capacious luggage space, has been configured which, is large enough to keep even a helmet. The Pleasure is equipped with a technology, tuff-up tube and tyre combo that offers immediate remedy in the event of a puncture, by releasing an anti-puncture sealant gel. It is capable of attaining a top speed of 77kph. Hero Honda ahead in introducing new technology. The Company has left the competition in the motorcycle segment far behind in volumes as its nearest rival, Bajaj Auto, is a distant second with a market share of around 28 per cent only. The company’s success till date relates to the timely decisions regarding introduction of new technology products. Hero Honda was the first company in India to set standards for fuel efficiency with the launch of a four-stroke motorcycle in the mid-Nineties. This decision is yielding good results even today as can be seen from an uninterrupted growth witnessed by the company in its sales turnover and profitability margins over the past several years. However, future growth in these financial parameters, to a large extent, would also depend upon the way competition gears up in the domestic motorcycle market from the local, as well as foreign players. An eye on the customer In an effort to enhance value for customers, the company has initiated the â€Å"Rs 1001 customer price† benefit program across all its models. In addition, the passport program — which entitles a customer to a Rs 1 lakh accident insurance, lucky draws, gifts against redeemable points, cash discount on consumer durables, free tickets to company sponsored events, etc. – has met with an encouraging response (it has attracted around five lakh members to date) and is expected to continue its success into the future as well. Hero Honda: A ‘passion’ for growth Hero Honda has come up with yet another year of sharp growth in financial performance. The company has developed this ability to spring a surprise in terms of outperforming expectationsThe increase in sales volume and improvement in realization have both played a role in pushing up the turnover. The change in product-mix in favour of higher value products has resulted in improved realization for the company. The growing popularity of the Passion model appears to be the key factor behind improvement in unit realization. Aided by the emphasis on indigenisation, the company has managed to achieve better operational efficiency. The positive impact of these measures is reflected in the form of lower raw material cost (in relation to sales). The company is all set to make a foray into the lower price segment of the four-stroke market. Taking into account the recent trend in performance, the company appears well positioned to retain its top position in the motor cycle market and also sustain the recent rate of growth. Hero Honda is World Leader For 2001- 02, volume up by 38 per cent ; net profit soars by 88 per cent; total turnover up by 42 per cent Achieves a high 48 per cent motorcycle market share; and 33 per cent two-wheeler market share Announces 350 per cent final dividend and 250 per cent celebration dividend (over and above special interim dividend of 250%) Over the last five years, company’s total turnover grows by a whopping 580 %; PAT by 919 % Hero Honda plans sports spectacular. Hero Honda plans to organize a sports and glamour extravaganza in the country, on the lines of the Laureus World Sports Awards currently on in Monaco , in association with the Laureus world sports for Good Foundation, the organizer of the award. Revving up to stay on top Having achieved the status of the largest two-wheeler company in the world, Hero Honda now seeks to retain that slot. The company has a large portfolio of brands, with the money-spinners being mainly Splendor (the world’s largest selling bike) and Passion. However, the company claims it was the launch of the 150cc CBZ, which established Hero Honda as an aspirational brand. â€Å"The launch of CBZ got us into a different league altogether. Celebrating its 25th year, Hero Honda released an innovative music video in the month of September. Titled â€Å"Hero Honda Dhak Dhak Go†, and involving as many as eight brand ambassadors of Hero Honda, the music video has been receiving rave reviews. WHICH STRATEGY OUT OF PUSH AND PULL IS USED AND WHY? Hero Honda is using both the strategy push as well as pull A push-pull-system in business describes the movement of a product or information between two subjects. On markets the consumers usually â€Å"pulls† the goods or information they demand for their needs, while the offerers or suppliers â€Å"pushes† them toward the consumers. Different push and pull strategies used by hero Honda: Push strategy Another meaning of the push strategy in marketing can be found in the communication between seller and buyer. In dependence of the used medium, the communication can be either interactive or non-interactive. For example, if the seller makes his promotion by television or radio, it’s not possible for the buyer to interact with. On the other hand, if the communication is made by phone or internet, the buyer has possibilities to interact with the seller. In the first case information is just â€Å"pushed† toward the buyer, while in the second case it is possible for the buyer to demand the needed information according to his requirements. Applied to that portion of the supply chain where demand uncertainty is relatively small Production & distribution decisions are based on long term forecasts Based on past orders received from retailer’s warehouse (may lead to Bullwhip effect) Inability to meet changing demand patterns. Large and variable production batches Unacceptable service levels Excessive inventories due to the need for large safety stocks Pull strategy In a â€Å"pull† system the consumer requests the product and â€Å"pulls† it through the delivery channel. An example of this is the car manufacturing company Ford Australia. Ford Australia only produces cars when they have been ordered by the customers. Applied to that portion of the supply chain where demand uncertainty is high Production and distribution are demand driven No inventory, response to specific orders. Point of sale (POS) data comes in handy when shared with supply chain partners Decrease in lead time Difficult to implement Key Hero Honda brands continue to drive strong volumes across segments – CD Deluxe in entry segment, Glamour, the new Splendor NXG, Splendor + and Passion Plus in deluxe segment, and Hunk, CBZ X-treme and Karizma in the premium segment. .Hero Honda’s strategy for aggressive top line growth through new product launches, brand building initiatives backed by innovative communication has resulted in market share gain across every segment. Indeed, Hero Honda’s share in domestic motorcycles market has been growing upward of 50 per cent, despite the slowdown in the two-wheeler industry â€Å"However, we will stay true to our winning strategy, and keep refreshing our product portfolio and continue to invest in brand building. CRITICAL APPRAISAL The feeling of freedom and being one with the Nature comes only from riding a two wheeler. Indians prefer the two wheelers because of their small manageable size, low maintenance, pricing and easy loan repayments. Indian streets are full of people of all age groups riding a two wheeler. Motorized two wheelers are seen as a symbol of status by the populace. Thus, in India, we would see swanky four wheels jostling with our ever reliable and sturdy steed: the two wheeler. Since the first car rolled out on the streets of Mumbai (then Bombay) in 1898, the Automobile Industry of India has come a long way. India is the second largest producer and manufacturer of two-wheelers in the world. Indian two-wheeler industry has got spectacular growth in the last few years. In India there are 7 scooter manufacturers, 9 motorcycle manufacturers, 3 moped manufacturers. Bajaj Auto, Hero Honda, TVS, etc are the leading manufacturers. HEROHONDA has been the world’s biggest manufacturer of 2-wheeled motorized vehicles since 2001, when it produced 1. 3 million motorbikes in a single year. Hero Honda’s Splendor is the world’s largest selling motorcycle. Today Hero Honda has an assembly line of nine different models of motorcycles available. It holds the record for most popular bike in the world by sales for Its Splendor model. Strategies followed by hero honda Premium pricing, penetration pricing, economy pricing, and price skimming are the four main pricing policies/strategies. They form the bases for the exercise. However there are other important approaches to pricing. Promotion: Below the Line Promotion: „Below The Line is a common technique used for touches and feel products. Those consumer items where the customer will rely on immediate information than previously researched items. Below The Line techniques ensure recall of the brand while at the same time highlighting the features of the product. ‘Honda’ was already a household name in India. Hence, rather than putting major efforts into brand building, its marketing strategy emphasized on offering innovative products at competitive prices, novel promotional campaigns and developing an extensive distribution network†¦ So at last we can say that hero Honda is having a very good promotional strategy and this is the main reason of its success. It basically focuses on its customer satisfaction and from time to time it keep on showing its creativity and innovation It â€Å"However, we will stay true to our winning strategy, and keep refreshing our product portfolio and continue to invest in brand building. â€Å"One of the key pillars of hero honda strategy has been to consistently keep introducing new, advanced products and maintaining a balanced product portfolio.

Management And Maturity Of Income Essay Example Pdf - Free Essay Example

Sample details Pages: 17 Words: 5147 Downloads: 10 Date added: 2017/06/26 Category Finance Essay Type Research paper Did you like this example? Financial Economics has made significant progress in asset management, the coordination between firms cash inflows with cash outflows by matching the maturity of income generated by assets with the maturity of interest incurring debts. People now little about the maturity structure of firms assets and liabilities, because willingly obtainable and thorough information regarding a firms liabilities and liabilities like commitment were not easy and time overwhelming to gather in our country, while many papers had explained how imbalances in the maturity period of asset and liability structure could be the main reason of currency and financial crises in the emerging markets, the factors that create such imbalances in the first place have established comparatively little attention so far. The agency costs can be reduced if firms issue short-term debt and, thus, are evaluated periodically. Don’t waste time! Our writers will create an original "Management And Maturity Of Income Essay Example Pdf" essay for you Create order Information asymmetry and conflict between shareholders and debt holders can be intensified in transition economies for three reasons: (i) lack of shareholder and creditor protection owing to the imperfect legal system; (ii) the high level of uncertainty enables firms with overdue debt to switch to high-risk assets, which increases flotation and/or transaction costs; and (iii) the ownership structure of companies in emerging markets creates potentially higher agency costs because managers dominate the board of directors and have comparatively greater control rights (Harvey, Lins and Roper (2004). Smith and Warner (1979) argue that riskier and smaller companies have higher agency related costs because managers of small companies have mutual interests with the shareholders since they are holding a larger proportion of the equity. The managers are interested in increasing the equity value even if doing so reduces the firms total value, behavior that obviously conflicts with the credi tors objectives. The objective of this study was to contribute and filling the gap of maturity mismatch between firms assets and liabilities, and firms can employ to reduce agency costs is to match the duration of assets and liabilities. Study showed theoretically how mismatch may lead to and exacerbate maturity mismatch due to market uncertainty, and how maturity mismatch increased output instability on the non/financial firms. Second, research provided empirical results that support the predictions that firms debt maturity was positively related to maturity of its assets to test this prediction the study made the model which depended on the following variable like debt maturity ratio, asset maturity ratio, market to book value ratio, and firm size. A common recommendation was that a firm would compare the maturity period of its assets to that of its long term liabilities. If long term liabilities had less maturity period with respect to assets, then there may not be sufficie nt cash on hand to pay back the principal when it was outstanding. On the other hand, if debt has a greater maturity period with respect to assets, then cash flows from assets come to an end, whereas debt expenses stay outstanding. Maturity matching could lessen these risks and then structure of corporate hedging that decreases predictable expenditure of financial distress. In a related element, Myers (1977) dispute that maturity matching could control agency conflicts between equity holders and debt holders by ensuring that debt reimbursements were planned to communicate with the reduction in the worth of assets. In a model of this fact, Chang (1989) revealed that maturity matching can reduce organization expenditure of debt financing. Hoven and Mauer (1996) study also reveals well-built support for the standard textbook recommendations that firms should compare the maturity period of their assets to that of their liabilities. Research investigation specified that asset maturity was an important aspect in explaining distinction in debt maturity structure. The sample of firms were taken from non/financial firms listed on the Kse-100 index and their financial data consisting from year 2004 to 2008 and those firms were used to analyze the distinctive financial characteristics. The reasons for choosing non-financial firms because it played significant role in the economy of our country and the measurement of maturity matching of assets and liabilities and reduction in agency cost would help these firms to avoid risks like liquidation and changing in interest rates. For example, if the duration of the maturity of assets was larger than the maturity period of its liabilities, then the maturity structure was at risk to growing interest rates. This was because the higher maturity period assets were more responsive to interest rates than the lower maturity period liabilities. If interest rates go up then the assets were turned down in value more rapidly than the liabilities were. If interest rates remain constant, there may be a deficit in supporting the liabilities. One way to diminish this problem was to rebalance the assets such that the maturity period of the assets were equal to the maturity period of the liabilities, then any interest rate modify has a minor outcome. If in the above case, the asset maturity period was too high, the maturity period must be shortened. This short fall may be achieved by either rebalancing the structure with shorter maturity period assets or by shorting longer maturity period assets, and if the firms debts and debt like obligations are larger then its assets in amount then this mismatch between the maturity period of assets and liabilities can lead it towards liquidation so to keep away from that liquidation the firms should keep up matching between the amount of its assets and liabilities, and companies that have a greater reliance on external finance face a comparatively weaker agency problem. De Ha as and Peeters (2006) agency cost issue can be alleviated by the higher variability of firm value, which can interfere with the firms ability to payoff its obligations. This was a key pattern of the advantage that Non-Financial firms listed on KSE-100 Index can acquire from this study by matching the maturity period of its assets to that of its debts and by reducing the agency cost problem. 1.2 Statement of Problem The objective of my study is to contribute to filling the gap of maturity mismatch between firms assets and liabilities, and the importance of agency cost, which shows theoretically how mismatch may lead to and exacerbate maturity mismatch due to market uncertainty, and how maturity mismatch increases output instability in the Non-Financial firms listed on KSE-100 Index. The purpose of the study is to notice whether the debt maturity structure described by Shah and khan (2005); Myers (1977); Titman (1992); Diamond (1991); Barnea, Haugen, and Senbet (1980); Jalilvand and Harris, (1984); Ozkan, 2000, Yi, 2005 and Whited, (1992); Warner (1979); Hoven and Mauer (1996); Barclay and Smith (1995); Barnea, Haugen, and Senbet (1980, 1985); and Hart and Moore (1995) present the detail regarding the debt maturity structure. The scope of study is to analyze the maturity matching structure between firms assets and liabilities, and agency cost problem. 1.3 Hypotheses H0: There is a posi tive relationship between Debt maturity and asset maturity. H1: There is a positive relationship between Debt maturity and Firm Size. H2: There is an inverse relationship between Debt maturity and Market to Book Ratio. 1.4 Outline of the Study The outline of the study processed as follows. Chapter one based on the introduction of the thesis, which consists of the some introduction of debt maturity structure by different researchers, the statement of problem, scope and objectives hypothesis etc. Chapter two consists of literature review given by different researchers, theories on debt maturity structure, and factors affecting the debt maturity structure. In chapter three, research methods were described, which contained method of data collection, sampling technique, sample size, research model developed, and statistical technique. Chapter four consists on the findings and interpretation of the results which were taken after the data collection process. Chapter five contained the conclusion, discussions, implications, recommendations, and future research. CHAPTER 2 LITERATURE REVIEW The literature included two types of theories about the debt maturity structure: agency cost theory, and maturity matching theory. 2.1 Agency Cost Theory Myers (1977) discussed that risky debt financing caused low investment benefits when a firms investment had chances to look for growth option. Financial Analysts worked to represent equity holders failed to accomplish profitable investment options because risky debt control a part of equity holders incentive in the form of a decrease in the probability of default. Myers represented that low investment benefits can be assured by providing short-term debt to mature before the growth options utilized. The hypothesis was that the firms assets had a greater ratio of growth options were used shorter-term debt. Titman (1992) presented that if growing firms have both the greater chances of bankruptcy and positive future-outlook then got incentive from borrowing short-term debt and going for a constant-rate contract. Briefly, there was an acceptance in the literature that growth (market-to-book ratio of assets) should be inversely correlated to debt maturity in the agency/contracting cos ts perspective. Williamson (1988) firms with more tangible assets should find asset substitution (risk shifting) more difficult, which lowers debt agency costs and thus raises optimal leverage. Hart and Moore (1995) defined the role of long-term debt in controlling managements capability in increasing funds for future projects. It was analyzed that long-term debt may restrict self-interested managers from financing non-profitable investments entails a direct variation of long-term debt with market-to-book ratio. Therefore, the relationship between growth options and debt maturity structure had an experimental issue. Diamond (1991) focused on the relationship between debt maturity and the credit value of a firm. Diamond defined liquidity risk as the risk that a debtor will lose control rents because creditors do not want to refinance, and therefore choose to liquidate the firm. Because short-term debt was seen by Diamond as being debt that matures before the profits of an in vestment were received, it was necessary to refinance short-term debt. For firms with high credit worthiness, the liquidity risk was not relevant. A decreased in credit worthiness did not lead to a crunch of credit to the firm. For this reason, firms with a high credit rating were expected to borrow on the short term. For firms with a medium credit rating, the liquidity risk can be of importance. Firms with a low credit rating also interested to borrow on the long term. Firms with a low credit rating were therefore forced to borrow on the short term. Firms with comparatively greater ratio of future investment opportunities tend to be littler. Barnea, Haugen, and Senbet (1980) found that organization conflicts, similar to Myerss (1977) underinvestment problem, could be restrained by reducing the maturity of debt. Therefore, smaller firms which faced additional harsh agency conflicts than larger well-maintained firms may use shorter-term debt to mitigate these conflicts. In most cases, the issuing costs of a public debt issue were fixed, and these costs were therefore self-determining of the size of the debt. Because public debt has a longer maturity than private debt, a positive relation between the size of a firm and the maturity of debt was proposed. However, those reasoning did not apply to small unlisted firms, because these firms make very little use of public debt. The present study also included leverage and industry affiliation as determinants of debt maturity. Arguably, larger firms have lower asymmetric information and agency problems, higher tangible assets relative to future investment opportunities, and thus, easier access to long-term debt markets. The reasons why small firms were forced to use short-term debt include higher failure rates and the lack of economies of scale in raising long-term public debt. It was further argued that larger firms tend to use more long-term debt due to firms remaining financial needs (Jalilvand and Harris, 1984). Agency problems (risk shifting, claim dilution) between shareholders and lenders may be particularly severe for small firms. Then, bondholders attempt to control the risk of lending to small firms by restricting the length of debt maturity. Large (small) firms, thus expected to had more long (short)-term debt in capital structure. Consequently, these arguments imply a positive relationship between firm size and debt maturity. It was widely accepted by the current literature that larger firms have lower agency costs of the debt (Ozkan, 2000, Yi, 2005 and Whited, 1992), because these larger firms were believed to have an easier access to capital markets (firms can more easily overcome the transaction costs) and a stronger negotiation power (firms have a stronger position in the debt negotiation than smaller firms). Hence both these arguments favor larger firms for issuing more long-term debt compared to smaller firms. In addition to it Smith and Warner (1979) argued that sma ller firms were more likely to face higher agency costs in terms of a conflict of the interest between shareholders and debt holders. Hoven and Mauer (1996) found out only little evidence for the agency cost aspect that debt maturity used to restrict the conflicts of interest between share holders and debt holders. Although smaller firms in the sample lead to used short term debt, findings also suggested that firms with big amounts of growth options have small leverage, and hence small to moderate incentive of debt maturity structure to reduce the conflicts of interest above the utilization of those options. Barclay and Smith (1995 ) test of the determinants of corporate debt maturity accepted the hypothesis that firms with greater growth choices in investment opportunity sets issued large amount of short-term debt. Study also found that firms issue large amount of long-term debt. The findings were robust to surrogate measures of the investment opportunity set. Technique as we ll propose to growth options in the firms investment opportunities be key in discussing both the time-series and cross-sectional fluctuation in the firms maturity structure. Study also supported strong relationship among firm size and debt maturity: superior firms issue a considerably bigger proportion of long-term debt. This was uniformed with the observance that small firms dependent more heavily on bank debt that traditionally had shorter maturity than public debt. Smaller firms had large growth options, which were indicating to employ shorter-term debt to reduce the agency conflicts; these indications assume debt as uncertain. Though, the capital structure theory suggested that these firms employ moderate amounts of leverage to mitigate the risk of financial loss. As such, firms with low leverage and low chances of financial loss would likely be unbiased to employ debt maturity structure to restrict agency conflicts, all other matters remain constant. Agency cost theory also proposed that smaller to medium size firms have relatively higher agency costs because the possible divergence of risk shifting and reducing the concentration between equity holders and managers (Smith and Warner, 1979). To overcome the issue and to control the agency cost short-term debts were recommended Barnea, Haugen, and Senbet (1980, 1985). The large constant flotation cost of constant securities comparative to the small size of the firm had an additional barrier that stops all small firms access to the capital market. Smith (1986) argues that managers of regulated firms have less discretion over investment decisions, which reduces debt agency costs and increases optimal leverage. Shah and khan (2005) evidenced the blended support for the agency cost, Study findings showed that smaller firms employ more shorter term debt then longer term debt; even there was no evidence that growing firms employ more of short-term debt as assumed by (Myers, 1977) that debt maturity varies i nversely to proxies for firms growth options in investment opportunities, The implication of firm size variable also verify the information asymmetry hypothesis, established it costly to access capital market for long term liabilities. 2.2 Maturity Matching Theory A frequent recommendation in the literature discussed that a firm should go with the maturity structure of its assets to that of its debt. Maturity matching can concentrate these threats and thus a structure of corporate hedging that decreased projected expenses of financial suffering. In a related element, Myers (1977) explained that maturity matching could control agency conflicts between equity holders and debt holders by ensuring that debt repayments had planned to match up with the decrease in the worth of assets in place. At the closing stages of an assets life, the firm encountered a reinvestment judgment. Concerning to debt that matures at that time assists to restore the suitable investment benefits as soon as new investments were needed. Though, this analysis specifies that the maturity of a firms assets did not the only determinant of its debt maturity. Its growth options play a vital role as well. Chang (1989) revealed that maturity matching could reduce organization ex penses of debt financing. Stohs and Maurer (1996) and Morris (1976) argued that a firm can face risk of not having sufficient cash in case the maturity of the debt had shorter than the maturity of the assets or even vice versa in case the maturity of the debt was greater than asset maturity (the cash flow from assets necessary for the debt repayment terminates). Following these arguments, the maturity matching principle belongs to the determinants of the corporate debt maturity structure. Emery (2001) argued that firms avoid the term premium by matching the maturity of firms liabilities and assets. Hart and Moore (1994) confirmed matching principle by showing that slower asset depreciation means longer debt maturity. Therefore, this study expected a positive relationship between debt maturity and asset maturity. Gapenski (1999) differentiated two strategies of maturity matching namely the accounting and financing approach. The accounting approach considers the assets as curren t and fixed ones and calls for the financing of the current assets by short-term liabilities and of the fixed assets by long-term liabilities and equity. The financing approach considers the assets as permanent and temporary. In these terms the fixed assets were definitely permanent ones and some stable part of the fluctuating current assets was also taken as permanent. This approach then suggests financing the permanent assets by long-term funds (long-term liabilities and equity) and temporary assets by short-term liabilities. Consequently, the financing approach generally employs ceteris paribus more long-term liabilities than the accounting approach does. Firms also consider asset maturity as an essential determinant of the debt structure. In contrast, companies that have a greater reliance on external finance face a comparatively weaker agency problem. The related agency costs are lower because the higher income variability of these firms erodes their capacity to cover their int erest and credit payments. Hoven and Mauer (1996) come across with well-built support for the regular textbook recommendations that firms should compare the maturity period of firms liabilities to that of firms assets. Study results were indicating asset maturity a key aspect in discussing instability in debt maturity structure. Shah and khan (2005) found unambiguous support for maturity matching hypothesis. Study findings reveal that the fixed assets vary directly with debt maturity structure. Myers (1977) argues that maturity matching of firm assets and liabilities can also partially serve as a tool for mitigation of the underinvestment problem, which was discussed in the agency costs theory section. Here the maturity matching principle ensures that the debt repayments should be due according to the decrease of the asset worth. Comparing maturities as an effort to list debt repayments to match up with the decrease in expected worth of assets now in place. Gapenski (199 9) differentiates two strategies of maturity matching namely the accounting and financing approach. The accounting approach considers the assets as current and fixed ones and calls for the financing of the current assets by short-term liabilities and of the fixed assets by long-term liabilities and equity. The financing approach considers the assets as permanent and temporary. In these terms the fixed assets are definitely permanent ones and some stable part of the fluctuating current assets is also taken as permanent. This approach then suggests financing the permanent assets by long-term funds (long-term liabilities and equity) and temporary assets by short-term liabilities. Consequently, the financing approach generally employs ceteris paribus more long-term liabilities than the accounting approach does. The financing approach (borrowing more on long-term basis) brings more stable interest costs than the accounting approach; but as the yield curve is usually upward sloped, the financing approach is also more costly. The financing approach versus accounting approach decision making is thus a classical risk return trade-off relationship. In praxis, the corporate commonly favor the accounting approach before the finance approach, the same holds for our consideration of maturity matching for the empirical evidence of the debt maturity structure. Based on these Maturity matching arguments, we will consider the impact of balance sheet liquidity immunization on the corporate debt maturity structure. The financing approach compared with accounting approach decision making had a classical risk return trade-off relationship. In praxis, the corporate commonly favor the accounting approach before the finance approach, the same holds for our consideration of maturity matching for the empirical evidence of the debt maturity structure. Based on these Maturity matching arguments, this study considered the impact of balance sheet liquidity immunization on the corporat e debt maturity structure. Guedes and Opler (1996) stated that the mean of estimation of asset maturity did not appear to be vary much between firms, those issue debt (term of one to nine years) and firms that issued debt up to twenty nine years term. But firms that issue debt for greater than thirty years term had assets with significantly long lives. Assumptions expect that firms will compare the maturity of assets and liabilities show that partially correct. Morris (1976) argues that such a strategy allows firms to decrease uncertainty both over interest costs over the assets life as well as over the net income that will be derived from the assets. (Emery (2001) the higher the term premium, the stronger should be the firms incentive for maturity matching. CHAPTER: 3 RESEARCH METHODS 3.1 Method of Data Collection Secondary data is comprised on non-financial firms listed on KSE-100 Index for year 2003-2008, collected from the different sources i.e. Karachi Stock M arket, Balance sheet analysis report published by State Bank of Pakistan and other internet sources. The data is comprised on following variables: Dependent variable Debt Maturity Independent Variables Asset Maturity, Firm Size, Market to Book Ratio, 3.2 Sampling Technique Procedure All the non-financial firms listed on the Karachi stock Exchange KSE-100 index selected for the purpose of conducting the research study. 3.3 Sample Size Sample for this study has been taken from Balance Sheet Analysis of non-financial companies listed on the Karachi Stock Exchange (2003-2008), a publication of Statistics Department of State Bank of Pakistan. The book contains six years data of balance sheets and income statements of non financial firms. 3.4 Research Model Developed Following model was determined the impact of different variables on the debt maturity and to test the hypothesis that the variables that impact on debt maturity were studied in this thesis, like: Asset Maturity, Firm Size, and Market to Book Ratio, by using multiple linear regression. DEBMAT = ÃÆ'Ã… ½Ãƒâ€šÃ‚ ± + ASSETMAT (ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²1) + SIZE (ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²2) + MV/BV (ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²3) + ÃÆ'Ã… ½Ãƒâ€šÃ‚ ¼ Where DEBMAT is Firms Debt Maturity (Debt maturing more then one year / Total Debt) ASSETMAT is Firms Asset maturity (Fixed Assets / Depreciation) SIZE is Firm Size (Log (natural) of total assets) MV/BV is Market-to- Book Ratio (Market value of firms assets / Book Value of firms assets)  µ is error term ÃÆ'Ã… ½Ãƒâ€šÃ‚ ± is the Constant 3.5 Statistical Technique After collecting the data from the selected population, it was analyzed by using SPSS software to study the impact of independent variables on the dependent variables. The statistical technique Multiple Linear Regression was used to identify the variables that impact the debt maturity. CHAPTER: 4 RESULTS 4.1 FINDINGS AND INTERPRETATION OF THE RESULT: Multiple linear regression technique applied through SPPS software by using the Enter method, which is highly recommended for this type of analysis. Following results appeared: TABLE 1: MODEL SUMMARY FOR DEBT MATURITY Model Summary Model R R Square Adjusted R Square Std. Error of the Estimate Durbin- Watson 1 .624 .389 .336 .16521 1.884 A. Predictors: (Constant), ln_assmt, ln_mkttobv, FIRM size B. Dependent Variable: sqrt_dema This table displays R, R squared, adjusted R squared, the standard error, and Durbin- Watson. R, the multiple correlation coefficients, is the correlation between the observed and predicted values of the dependent variable. Larger values of R indicate stronger relationships. R squared showed the percentage of deviation in the dependent variable explained by the regression model. Small values specify that the model did not in shape with the data well. Dependent variable (Debt maturity) and two independent variables (asset maturity, and market to book value ratio) were transformed to make the data normally distributed. It shows that 38.9 % variation in dependent variable (square root of debt maturity) was due to independent variables (log of asset maturity, firm size, and log of market to book value ratio). TABLE 3: ANOVA FOR DEBT MATURITY ANOVA Model Sum of Squares df Mean Square F Sig. 1 Regression .592 3 .197 7.228 .001* Residual .928 34 .027 Total 1.520 37 A. Predictors: (Constant), ln_assmt, ln_mkttobv, FIRM size B. Dependent Variable: sqrt_dema This table summarizes the results of an analysis of variance. If the significance value of the F statistic is small (smaller than say 0.05) then the independent variables did a fine work to clarify the deviation in the dependent variable. If the significance value of F is greater than 0.05 then the independent variables didnt clarify the deviation in the dependent variable. In this model the significance value of the F statistic is less then 0.05, thus the independent variables did a fine work to clarify the deviation in the dependent variable. TABLE 5: COEFFICIENT FOR DEBT MATURITY Unstandardized Coefficients Standardized Coefficients t Sig. Collinearity Statistics B Std. Error Beta Tolerance VIF Model 1 (Constant) -.733 .301 -2.434 .020 ln_assmt .266 .065 .559 4.063 .000 .948 1.055 FIRM size .041 .020 .288 2.097 .043 .954 1.048 ln_mkttobv -.055 .042 -.180 -1.311 .198 .957 1.045 EQUATION: Sqrt_dema = -0.733 + 0.266*ln_assmt + 0.041* Firm size 0.055*ln_mkttobv +  µ In this model square root of Debt Maturity was the dependant variable and the independent variables include Asset Maturity, Firm Size, and Market to Book Ratio,  µ is the error term. If debt maturity changed by 1 unit then asset maturity increased by 0.266, firm size increased by 0.041, and market to book value ratio decreased by 0.055. 4.2 HYPOTHESES ASSESMENT SUMMARY The hypotheses of the study were distinctive financial characteristics have significant impact on debt maturity. These financial characteristics were asset maturity, firm size, and market to book value ratio. In this study each the financial characteristic tested and concluded the results. TABLE 4.3 : Hypotheses Assessment Summary S.NO. Hypotheses R Square Coefficients SIG. 0.05 RESULT H1 There is a positive relationship between Debt maturity and asset maturity. 0.389 0.266 0.000 Accepted H2 There is a positive relationship between Debt maturity and Firm Size. 0.389 0.041 0.043 Accepted H3 There is an inverse relationship between Debt maturity and Market to Book Ratio. 0.389 -0.055 0.198 Accepted Chapter 5 DISCUSSIONS, IMPLICATIONS, FUTURE RESEARCH AND CONCLUSIONS In this study, multiple linear regression analysis is exercised to examine data collected from listed Pakistani non-financial firms for period 2003-08. Regression analysis is used to measure the long term debt used by firms. Debt maturity is taken as a dependent variable in the study where as asset maturity, firm size, and market to book value ratio are independent variables to measure their effect on debt maturity. 5.1 Conclusion The study concludes that the most important variables are debt maturity, and asset maturity. According to this study, these variables are most important in the prediction/ anticipation of maturity structure of firms asset and liabilities. According to study, asset maturity is very important for the model to predict the debt maturity structure. Asset maturity is positively related to debt maturity. This study confirmed matching principle by showing that slower asset depreciation means longer debt maturity. These results were also supported by Hart and Moore (1994). Firm size is also one of the important variables for this study. This study found out only little evidence for the agency cost aspect that debt maturity used to restrict the conflicts of interest between share holders and debt holders, these results were matching with the study conducted by Hoven and Mauer (1996). These results were varied in various countries, because there have been difference in environments and circum stances and firms make decision accordingly, it also showed that smaller firms employ more shorter term debt then longer term debt, which was supported by Shah and khan (2005). There was an acceptance of growth (market-to-book ratio of assets) should be inversely correlated to debt maturity in the agency/contracting costs perspective in this study, these results were supported by Titman (1992). 5.2 Discussion All variables were considered to be in line with the literature, however, based on regression coefficients shown by many variables along with dependency problem, the final model comprised of independent variables; asset maturity, and firm size had significant value of less than 0.05 which suggests that these variables have significant impact on the debt maturity of non-financial firms listed on KSE-100 index. On the other hand, results also revealed that market to book value ratio had significant value greater than 0.05 therefore it may not necessarily lead to an impact on non-financial firms listed on KSE-100 index. 5.3 Implications and Recommendations This research was limited to the non-financial firms listed on Karachi Stock Exchange. The data taken from 58 firms are taken through various sectors for the year 2003-08. It was suggested that such type of study should be carried out in other countries of Asia as well, as to have comprehensive idea about the debt maturity structure. Moreover, it is also suggested that other factors except ones examined in this study should be researched as to have perfect idea about the debt maturity structure. Besides that, this study can also be replicated in other developing countries. Reference Jose Guedes and Tim Opler The Determinants of the Maturity of Corporate Debt Issues The Journal of Finance, Vol. 51, No. 5 (Dec., 1996), pp. 1809-1833 Andreas Stephan, Oleksandr Talavera, and Andriy Tsapin (2008) Corporate Debt Maturity Choice in Transition Financial Markets Working Paper No.4/03 Harvey, C.R, Lins, K.V, and Roper, A.H (2004). The effect of capital structure when expected agency costs are extreme Journal of Financial Economic 74(1), 3-30. Attaullah Shah Shahid Ali Khan (2004) Empirical Investigation of Debt-Maturity Structure: Evidence from Pakistan Faculty member Institute of Management Sciences, Peshawar Mark Hoven Stohs and David C. Mauer The Determinants of Corporate Debt Maturity Structure The Journal of Business, Vol. 69, No. 3 (Jul., 1996), pp. 279-312 Michael J. Barclay and Clifford W. Smith, Jr. The Maturity Structure of Corporate Debt The Journal of Finance, Vol. 50, No. 2 (Jun., 1995), pp, 609-631. Williamson, 0, 1988, Corporate Finance and Corporate Governance Journal of Finance, 43, 567-591. Myers, S.C. (1977). Determinants of corporate borrowing Journal of Financial Economics 5 (November): 147-75 Hart, Oliver, and John Moore, (1995) Debt and seniority: An analysis of the role of hard claims in constraining management American Economic Review 85, 567-585. Smith, C, W, Jr, and Warner, J.B, (1979) On financial contracting: An analysis of bond covenants Journal of Financial Economics 7 (June):117-61. Diamond, Douglas W. (1991) Debt maturity structure and liquidity risk Quarterly Journal of Economics 106, 709-737. Chang, C, 1989. Debt maturity structure and bankruptcy Working paper, Minneapolis: University of Minnesota. Kim, C.S Mauer, D.C, and Stohs, M. Hoven. (1995). Corporate debt maturity policy and investor tax-timing options: Theory and evidence Financial Management 24 (spring): 33-45. De Haas, R, and Peeters, M, (2006). The dynamic adjustment towards target capital structures of firms in transition economies Economics of Transition 14(1), 133-169. Barclay, M.J, and Smith, C.W, Jr. (1995). The maturity structure of corporate debt Journal of Finance 50 (June): 609-31. Titman, S, and Wessels, R, (1988). The determinants of capital structure choice Journal of Finance 43 (March): 1-19. Gapenski, L. C. (1999): Debt-Maturity Structure Should Match Risk Preferences Healthcare Financial Management, December 1999, pp. 56-59,