Lee and Runge indentified three precursor factors in the IT adoption among small and medium sized retailers.

• The perception of the owner on the relative advantage of using IT.
• The social expectations on the usage of IT and
• The owner’s innovativeness in managing his business.

The study found out that among the four antecedent factors, the owner’s innovativeness being the strongest determinant for the adoption of the information systems (Lee J.W. & Runge J., 2001). An innovative owner will definitely indentify the advantages of incorporating E-Commerce in his business and accordingly be able to create new benefits for the business through an innovative uitlisation of E-commerce technology.

Hypothesis- the more innovative the owner, the more likely for the firm to adopt the E-commerce technology.

Owner’s Technological Knowledge

An owner’s technological knowledge is another significant factor that influences the adoption of E-Commerce. If the owner is well versed with the global technological developments and the benefits that can be harnessed from these technological advancements, then he is more likely to adopt technology in the form of E-commerce. Lack of technological knowledge on the owner’s part will inhibit the adoption.

Hypothesis- the more technological knowledge the owner possesses, the more likely for his firm to adopt E- Commerce technology.

Technological Context

Relative Advantage

Relative advantage is the extent to which the potential adopters and the customers perceive the new idea or innovation as superior to the current and existing conditions. According to Kwon and Zmud, “relative advantage is the degree to which adopting an innovation is perceived as providing greater organizational benefits than maintaining the status quo” (Kwon T.H. & Zmud R.W., 1987) In simpler terms relative advantage describes the amount of benefits and detriments an organisation will experience for adopting or rejecting a new innovation or technology, respectively. The extent of relative advantage is generally measured in terms of saving and time and effort, the economic profitability, the reduction on cost and the increase in production. Economists world-wide agree that relative advantage is one of the best of an innovation diffusion or adoption rate.

Roger’s classical theory on diffusion on innovations which has been widely used in the literatures of the past highlights five of the identified elements of an innovation which are the main determinants explaining 49% to 87% of the discrepancy in the rate of E-Commerce adoption (Hussin H & Noor M.R., 2002). On the basis Roger’s “Diffusion and Innovation Model”, these five aspects under identified characteristics of innovation were adopted in order to test the perception of SMEs en route to the adoption of E-Commerce Technology. One of the five identified characteristics of innovation of E-Commerce was Relative Advantage. Relative advantage implies to the perceived benefits that can be reaped by the SMEs through the adoption of E-Commerce to facilitate a particular enterprises’ business activities as measured by wider market exposure, lower business costs, business process efficiency etc (Rogers E.M., 1983).

Hypothesis- If the perceived relative advantage of E-Commerce is more, and then it is more likely for a SME to adopt E-commerce.

Chapter 3: Missing Parts

Organisational Context

Organization Size

The size of the firm or the size of an organisation is one of the key adoption factors. Previous researches on the subject suggest that smaller firms may have reduced chances of adopting E-Commerce. However, as for those small firms that do adopt information technology, certain individual factors have been identified as the key elements that drive adoption of technological innovation. These individual factors include alignment of the technology with the business strategy, the perceived benefits, relative advantages, compatibility, complexity, proactivity towards technology, trialability, financial and organisational support etc. The size of a firm not only influences a firm’s ability and readiness to adopt E-Commerce but also the extent to which technology will be adopted by the firm. This simply means that larger firms tend to adopt technology at higher levels while the smaller firms are inclined to adopt technology at the lower levels (Cragg B. P. & Mills M.A., 2009)

A firm’s prior usage of technology in the form of PCs with modems and an affinity towards the internet and e-mails will also affect the diffusion of the new innovation.  An organisation with a large amount of transactions and data is more likely to adopt E-Commerce as this can be of great assistance in streamlining operations and as well as in offering process efficiency within the organisation (Thong J. and Yap C, 1995).

Owners Attitude

The adoption of E-Commerce by the SMEs relies heavily on the acceptance of the technology of e-commerce by the business owners. If the owner does not identify with the usefulness of technology nor has an understanding of its potential, then naturally the owner will be reluctant to adopt E-commerce. However, on the other hand if the attitude of the owner is positive, that is, if he is well aware of the intricacies of computers and has some knowledge on technology and how ways to reap benefits from it, then the business is likely to adopt e-commerce (Lubbe S. et. al. 2003). Another case where an owner is likely to adopt E-Commerce for his business is on the recommendation of experienced people. Before investing on the adoption E-Commerce the owners also considers the return he will be getting for his investment. This concern for the returns on the investments made often leads to the small and medium sized firms being more anxious on their mid-term survival rather than on the long-term viability (Lubbe S. et. al. 2003). Henceforth, the most of the small and medium sized business owners are often hesitant on making investments when short or medium-term returns are not guaranteed.

In case of the adoption and implementation of the E-Commerce within the business mechanism of SMEs, the need for the owner’s or the top management’s commitment and support during the process of assessment of the innovation or the technology is of the utmost importance. Support and commitment on part of the owner or the top management ensures that there is an obligation within the resources, which in turn will create a conducive environment within the organisation for the adoption process of the technology.

Hypothesis- the more positive the attitude of the owner and the greater the extent of support, the more likely the SME will adopt the E-Commerce technology.

The healthcare services sector is a very sensitive sector as far as direct investment is considered. The idea of commercialization of healthcare services is of critical concern to the policy makers. Being a basic service, extent of investment in the same and its effects must be judged cautiously. The pricing of the healthcare service is also very crucial. It requires considerable effort on the part of government to ensure that the service does not become overpriced for a majority of the residents. There should be strict regulatory guidelines that will ensure that effects of investments are not entirely based on profit motives. This aspect must be given an upper hand even if it means curtailing a portion of foreign investments. (Richard S., December 2004)

In Thailand, for example, the government has taken a highly restrictive stand as far as healthcare services are considered regarding the management of healthcare institutions by foreign companies. The financial services sector is also opened only as per requirement. It has drafted the Foreign Business Act whereby most sectors of the economy are guarded from majority stake holding by foreign bodies. However, exception to this is done only for US investors in the lines of Treaty for Amity and Economic relations. (Thailand, n.d.)

Foreign investment has always evoked multiple sentiments in the minds of the people. Foreign investment is a compelling fact staring at the face of every economy today. The country specific cases discussed in this essay hold light to the fact that even in the times of financial crisis and global economic uncertainty, foreign investment in the right amount and in the right industry, plays an important role in lifting the economy from the slump. However foreign investment should not take place rampantly and indiscriminately. Foreign capital should be promoted in the cases where it enhances the growth and development of a nation and restricted when it aims to generate monetary benefits for the foreign country only. However, for the cases in between these two poles, the onus is on the state to decide, considering all possible pros and cons of the investment.

The manufacturing sector is supposed to have direct benefits of foreign direct investment through increased flow of capital and import of technology through spillover effects. However, recent research in this area has shown that there is very little considerable spillover effect in the host country. Even the gains from this effect differ across primary, secondary and tertiary sectors. The weak linkages in primary and mining sectors often lead to what is known as ‘enclave development’.

Secondly, rate of spillover is dependent on absorptive capacity of the domestic firms. Positive spillover is experienced by those firms having a high degree of absorptive capacity, whereas those domestic firms with low levels of initial productivity will experience negative spillover. In order to ensure Technological spillover, it must be guaranteed that the support staff of engineers and managers be hired from foreign firms. A young workforce is another requirement who would be instrumental in the process of spillover through their interactions and eagerness to learn. As such, flow of FDI in economies with low absorptive capacity might now benefit the local economy. Additionally, these manufacturing facilities may have a detrimental effect on the local ecology and the natural resource base of the country. (Hale G. and Long C., April 2006)  Hence, in these cases, FDI should be discouraged.

Foreign Direct Investment is also accused of creating negative impact of wages in the manufacturing sector. This might be aggravated in for female laborers. One possible argument for this phenomenon arises from the increase in supply of workforce due to opening up of boundaries. This abundance in supply will led to movement of FDI to regions where they get favorable bargain. So, FDI should be discouraged in regions where there is negative impact on the bargaining power of the labour class. (Vijaya R.M. and Kaltani L., 2007)

It is estimated that the emerging economies like China will require huge supply of oil to cater the energy requirements of its growing population. In order to reduce its dependency on imports and small amounts of backup reserve, China has been investing in the energy resources of around twenty five countries. This has ranged from exploration and production activities to building of refineries and infrastructure. A major part of the investment of China has been in Sudan. In spite of having the privilege of rich resources, Sudan was unable to tap them due to lack of capital. Chinese investment was instrumental in building Port Bashir, a two million tonne terminal. Today Sudan is being considered as a major oil producing economy. Similar investments have also been done in Kazakhstan and Canadian sands. (Chorell H. and Nilson E., 2005)

The major allegation against foreign direct investment is that it has fuelled erratic and sporadic growth. It has also been alleged that countries with poorer natural resources have a higher rate of growth than their richer counterparts. This phenomenon has been termed as ‘curse of natural resources’ in economic literature. The reason for this is organizations that invest in natural resources industries are often biased towards maximizing their own objectives.

In fact, research shows that FDI has considerable negative effects as far the exploitation of natural resources is considered. Beneficial effects of the same can be gained if there are certain regulatory frame works that control the flow of the FDI. The proponents of FDI are countered in their opinion by nature conservationists. They are justified in their point that the six folded increase in FDI globally in the last decade has also been simultaneously accompanied by equivalent amount of environmental destruction and degradation.

The role of state becomes important at this juncture. In a free market economy the benefits of investment does not reach all the strata of the population uniformly. More often the very capitalist nature of FDI imbibes a profit motive in the direction of its movement. It is in this situation that the State assumes an increasingly important role. Globalization gave rise to the myth of fading states where the unification of countries were thought to make a boundary less world with  the state having no role to play. Peter Dicken in his book ‘Global Shift: Reshaping The Global Economic Map In 21^st Century’, argues in favour of the role of the state in present economic scenario. The regulatory framework of the state in controlling foreign investment can be classified into four categories.

First, the government can “screen out” those investments which are not directed towards meeting of national economic and political aspirations. FDI may be actively discouraged in certain sectors that are of importance to the sovereignty of the host nation. The government is also instrumental in controlling the degree of openness of a particular sector towards foreign capital depending on its sensitivity.

Second, foreign firms pose threat of competition to domestic firms who might be operating on lower technologies. The government may encourage or discourage FDI depending on whether the investment will add to the competitiveness of the local companies. The state, in its own power, is in a position to design policy that will monitor spillover of technology. This is particularly important since there is a considerable debate on the fact that transnational economies do not transfer significant technology outside their own country.

It is of particular importance that taxation policies are so designed that the host economy benefits from the corporate tax yield of the foreign firm. The TNCs are also keen in remitting their profit abroad. In a nutshell, state governments must ensure that there remains a proper balance in the flow of outward capital in form of tax and profit, which would have otherwise benefited the host country. (Dicken P., 2003) This analysis serves as a guiding force in deciding the fate of FDI. Capital being the engine of growth, FDI is desirable in those sectors of a nation which are pivotal to its development. On the other end of the spectrum, State must actively restrict FDI in not-so-strategic sectors, which does not strengthen the economy or pose a threat to the ecological/economic balance of the host.

The period post second world war has experienced cyclical variations in global economic activities. The period from early 1950 to 1970 experienced an impressive growth, immediately led by a deep recession which lasted till 1980. This was followed by recovery through the 1980s and culminated in volatile growths of the 1990s, with some interrupting global crisis in between. The change in the growth patterns can be attributed to structural changes in which the world became multi-polar, with center of productions emerging in the peripheral regions. The transnational corporations have been significantly important in shaping the dimensions of the globe, considering that they have extraordinary powers as far as taking advantages of distribution of factors of production is concerned and their ability to switch resources as and when needed. An important factor shaping the global change would be the speed at which technological innovations took place that has influenced virtually all aspects of human life.

The real effects of globalization can be felt at the local level of an economy. The local level is the point where effects of foreign investment are visible through their impact on various activities of householders. In recent times, the high technology goods have borne a key contribution in global growth. In Latin America in particular, this has become a major driver of growth. The growth in these hi tech industries was brought about by opening up of economies to free trade and foreign investment in face of not so successful government initiatives during 1970 and 80s.

Globalisation is the defined as  “closer integration of the countries and peoples of the world which has been brought about by the enormous reduction of costs of transportation and communication, and the breaking down of artificial barriers to the flows of goods, services, capital, knowledge and (to a lesser extent) people across borders”. (Dr. Vazquez D., 2009A)

Globalisation has dissolved national borders and turned the world into a global village. A relevant effect of globalisation is the presence of an organisation in number of countries in addition to its birthplace. This has changed the scenario of global business significantly. Multinational enterprises have come into existence which have their operations and existence located in more than one country.  These are organisations that have control over assets, factories, mines, sales offices in two or more countries. (Dr. Vazquez D., 2009E)

Flow of capital from one nation to another may occur in two different ways: the direct route or the Foreign Direct Investment and the indirect route or the Foreign Portfolio Investment.  A definition by the Bureau of Economic Analysis states foreign direct investment as “an investment in which a resident of one country obtains a lasting interest in, and a degree of influence over the management of, a business enterprise in another country”. (Assessing Trends and Policies of Foreign Direct Investment in the United States, July 2008)

The reasons behind FDI are many and depend upon a range of factors that guide the business model of the investing company. The widely accepted theory to analyze the investment motives have been provided by John H Dunning. Popularly named as the Eclectic theory, it is a combination of three sets of advantages that must be present for a company to invest abroad. First is an ownership-specific advantage (O), which states the advantages the company would gain over similar firm or countries in the market. Second is a location specific advantage (L) that determines the region where the firm invests. Finally, the internalization advantages (I) explains the need and benefits to invest against the option of obtaining the same through trade relations. Considered together, these factors define the OLI framework on which eclectic model is based. (Chorell H. and Nilson E., 2005)

According to data published by US department of commerce, investments by US firms abroad in 2007 figured at $333 billion. Counter wise, the volume of foreign investment in US real estate and business amounted to $237 billion in 2007. The importance of FDI can be gauged by the fact that the Organization for Economic Cooperation and Development (OECD) has taken measures to ensure steady flow of investment through special agencies. (Jackson J.K., August 2008)

The concept of foreign direct investment is one of the most complex and intricate topics of modern economics. The complex structure of flow of investment between transnational corporations (TNC) can be classified into two categories; outward investment by domestic firms and inward investment by foreign firms. In certain cases, however, the government of a country might take a totally opposing stand as far as allowing of FDI is concerned. It is generally believed that an economy with the exposure to inward investment will enjoy a better growth than countries that stay away from investment. The discussion becomes interesting if the data for 30 years in World Bank Economic Outlook 2007 is considered. According to this report, the growth in economies as a result of globalization has been positive, but has been unfortunately accompanied by a widening gap between the rich and poor nations. Since 1990, inequalities have widened 6 times between countries and about eight times within a country. (Dr. Vazquez D., 2009A) This fact bears testimonial to the allegation that globalization has aggravated inequalities in global distribution of income and wealth.

Predictions of share prices are next to impossible. The logic applies to all the markets and to all the shares of the indices through out the globe as it depends upon the human psychology. With thorough research over the years on the movements of the share prices, analysts have identified few major factors that contribute to the significant movement of the share price. Along with external factors like macro economic happenings, industry news, interest rates, market trends, general mood of the investors, inflation, it has been found that the share prices also depend on huge extent upon the declaration of the earnings and dividends as share holders hold the shares to earn. Though the share prices of the companies with lower growth rate are found to be highly impacted with the EPS but the companies with higher growth rate has lesser relationship in between its share price and the earning per share (Chang, H., Chang, Y., Chen, Y. & Su, C. n.d.)

The other factors that affect the movement of the share prices include certain announcements and news of the industry and the concerned company. To get a brief view, two cases of Tomkins and Rolls-Royce are considered.

Analysing the case of Tomkins, Plc it is found that the share prices went up by 12.08% on 31^st October, 2008. The reason behind such increase has been the declaration of total voting rights.

For Rolls-Royce, the disclosure of the shareholdings of the directors and the connected persons had positive impact on the share prices. On 7^th of August, it was found that the share price was up by more than 9.5% as the director holdings were made known to the market. The underlying fact might have been that the market got the boost and the confidence with the scrip as the information of the holdings by the managerial positions was made public.

Conclusions

The study of the earning per share and the price movement of the shares of the concerned company reveals the proposition of higher the EPS, more the share price holds good. The share prices movements were analysed with the abnormal returns of the company. The fact that most of the times, share prices are unpredictable because the price of the share depends upon the whole lot of factors. The investors’ decision often rests upon the psychological factors and also the expectations and fears of the market at large. To predict the probable movement of the share prices constant research is required.

The relationship between Buy Hold Return and the Cumulative Abnormal Return from the day 11 to day -9 of the 10 selected companies.

In the graph, 1 denotes day 11, 2 denotes day 10. Similarly, 21 denotes day -9.

The Buy Hold relationship denotes that the extent to which the investors agree to buy the shares and hold them irrespective of the market fluctuations. The Cumulative Abnormal Return is the difference between the expected return on a stock and the actual return that comes from the release of news to the market.

The relationship shows that the market is over-reacting to the information available. As the share prices largely depend upon the psychology of the shareholders apart from the technical factors, the over reaction is quite predicted. The recent economic recession had also played role to the over reaction as it inculcated the fear factor among the investors.

Disclosure of total voting rights by British Airways in 2008 had impacted the share price of the company by more than 15%. It was havoc for the company.

In case of Vodafone, it is observed that transaction in own shares, which continued in the major part of 2008, drenched lot of value of its share.

Declaration of director holdings at British American Tobacco increased the share value by more than 5% in 2008 which was good for the company.

Even for Unilever the transaction of own shared have reduced the share price in 2008.

With the analysis of four companies, the trend can be understood well. The share prices of the company suffered dip when there was transaction on own shares. The prices of the share had positive impact when total voting rights were declared (some times reverse also happened, if the total rights were reduced). If the market was informed about the director holdings, the trend observed was also positive.

The abnormal return of the share of Unilever, Plc on the day of the declaring EPS was negative but then after declaring over 35% increase of EPS over the last year, the abnormal return of the company’s share saw positive trend on day 1. Also, the share price of the company saw increase over the next few consecutive days.

The Rolls-Royce group had declared EPS in negative. The absolute change of the earning per share has been around 107 pence in negative. The percentage change over the year has been more than 318% (negative). Analysing the market reaction to such horrible figures it is found that the abnormal return on the very date i.e. day 0 is negative. The change of abnormal return from day 0 with day -1 was -3.11792. But it is found that on the day 1, the abnormal return is positive. It hints to the fact that the there has been a possibility of information leakage. The analysis of the abnormal return shows that though the company had such negative earnings, yet the market credits the share of the company with positives. It ratifies the fear that the inside information was already leaked and so as soon as the results were declared steps were taken to take the market advantage.

The earning per share of Sainsbury for the year 2008, declared in 2009 was 19.1 pence. Comparing it with the previous year, it is found that there has been decrease of 0.1 pence i.e. 0.52%. The abnormal return on the day on which the results were declared was negative. It can be analysed and said that the reason for such market reaction was because of the negative increases in EPS. So the proposition holds good in this case. But the abnormal return on day -1 and day 1 was positive which suggests that the market took the declaration of negative earning as expected and therefore, there could have been information leakages and the results were discounted.

In case of Tesco, the declared EPS in 2009 was 26.61 pence which is 14.16% more from the previous year. The study of the market reaction through abnormal returns shows that the abnormal return is positive on day 0 and also on day -1 and day 1. This pertains to the fact that most probably this has been a case of information leakage to the market and the leakage was true. We can derive such a conclusion because prior to two days of declaration of results to day 1, the trend of abnormal return was on the same direction. Even if there was no leakage, the proposition holds right because as the EPS increased, the abnormal return was also positive.

Analysing B T Group, the declared earning per share for 2008 was 22.7 pence which is above 5% more than the previous year. Analysing the results declared with the abnormal returns of the share of Tesco, it is found that the abnormal returns of the share remains negative even with positive EPS. The comparative change in abnormal return of day 0 with day -1 is calculated to be -0.21184 and is -0.85827 for day 1 to day 0. The case does not agree with our proposition. It might be that the share holder had higher expectations from the company’s results or some other external factor played havoc. The fact of information leakage could also have happened.

The case of Tomkins also shows positive earning per share. The last declared EPS of the company was -7.29 pence which experienced decrease around 143% change with respect to the previous year. The abnormal return of the share on day 0 shows negative trends and it continues till day 2. It again supports our proposition.

Today, it is been well accepted that the stake holders are the most important factor to the companies. The companies through out the world are striving to keep the relation intact and if possible, to improve further with its investors, suppliers, creditors and other related parties. It is well known in the corporate world that investors i.e. the share holders provide the costliest source of funds to the companies. In general, they are under no obligations to hold the shares of the company and any time they can opt out of such holding. To keep them integrated with the company, the company should provide them the expected benefits and growth. The most common way of measuring the performance of the company is through the study of the financial statements, dividends declared and earning per share, etc. The performance of the company an also be measured by the market price of its share. According to the traditional belief, the share price of the company’s stock would have an increasing trend if the company is performing efficiently. And it can be deciphered that if the company is performing efficiently, it can be revealed through its financial treatments. Going with the logic, the change in accounting earnings should be directly related with the change in share prices.

The report aims to understand the above logic and the extent of such effect. To verify the notion, ten companies listed with London Stock Exchange are selected. The date of declaring of the earning per share is taken as the base day and the relation is change in EPS and the share price is compared.

Task 1

In order to verify the notion, the ten UK based non-financial companies selected are as follows:

• British Airways
• Vodafone
• British America Tobacco
• Aviva
• Unilever
• Rolls-Royce
• Sainsbury
• Tesco
• B T Group
• Tomkins

Task 3

Analysing the abnormal return for British Airways on the date of declaring EPS, it is found to be -0.0338. It implies that on the day 0, the share price of the British Airways fell as fell the market index. The EPS of the company has seen increase of 33.5 pence per share i.e. 131.37%. Even on the day 1, the abnormal return is found to be negative. But it should be noted that after such increase in EPS, the share prices of the company increased for two consecutive days. Though the proposition does not hold good in this case, it can be said that because of the general mood of the investors and the market, it got the hit as the market return was also on continuous fall.

The abnormal return of the share of Vodafone on the date of declaration of the EPS i.e. day 0 was 0.00175 where as the day 1 and day -1 both had negative abnormal returns. This can be because of the expectation of the shareholders to earn high EPS. The company declared increase of 11% in earning per share compared to the previous year. The rate of increase might not have supported the level of expectation and consequently the share price fell the next day.

The case is reverse for the next company, the British American Tobacco. The abnormal return on the share price of the company was negative on the day 0. The share holders might not have expected dividends. But once the company announced the EPS of 123.28 pence (increase of 17.20 %) over the previous year, the share prices saw continuous upward trend for nine consecutive days. Also, the abnormal return of the company’s share price saw increase till day 8. The fact holds good for the proposition.