Promotion And Purchase Decision Toward Canned Food Marketing Essay


Canned food also knows as preserved food. Canned food products always describe in the term of ready meal (Euromonitor International, 2011). In the 19th century, canned food products were introduced in the market but with limited choice (Rogers, 2011). The canned products were offered in the convenience purpose to the consumers at that period of time. In time to time, those canned food product companies have introducing difference type of canned food to the consumer to choose. The category of canned food products included beans, fish/seafood, fruits, meats, pasta, soup, vegetable and other. The taste of the canned food was having an improvement to more palatable.

Compared to other food products such as fresh food, frozen food, instant food product and so on, canned food products were especially popular with consumers who did not have a great deal of cooking experience or time to prepare meal. Therefore, the demand of canned food products was higher than past. Through the investigation, the result shows that canned food sales have reach to RM 961 million in 2011 which higher than RM 931 million in 2010 (Eutomonitor International, 2011). Canned food products offered the convenience, affordable price, longer shelf-life which within 2 years and easier storage reason to influence the consumer purchase decision. Mostly, canned food products are targeted to the people who are not time to purchase the fresh food in the market or did not have time to prepare meal. But some consumers will purchases the canned food products due to the nutritional value that had listed on the label. Therefore, different consumers have difference perception toward the canned food product to influence themselves making the purchase decision.

1.2 Statement of Problem

Consumers always have their own reason to purchase the product whether food, apparel, daily product and so on. Customer purchase decision is based on eight mental which include perfectionist, brand consciousness, new and fashion conscious, leisure and shopping conscious, price awareness, impulsiveness, selective confused and brand loyal (Sproles and Kendall, 1986). Other than that, functional need and emotional need (Consoh, 2009) also influence the customer purchase decision.

Nowadays, many companies offer their own brand canned products to attract the target consumer. For example, the bean canned food products which have Yeo’s, Campbells, Ayam brand and etc. Consumers have their own perception toward the particular brand of canned food products and make a purchase decision toward the particular brand products. In major consumers’ perception, canned food products have a bad reputation for being less nutrition and contain preservative ingredients in the foods (Stein, 2011). Sometimes consumers may need to switch the choice to preserved food such as frozen, dry and canned food. Due to the reason of the certain fresh food are unavailable in the market or groceries store in the particular season or period. For example, the seasonal fruit like longan.

In this study, focus on the canned food products, canned food products are popular in among other frozen, dry and fresh food products. The advantages of consume canned food not lesser than other food products. Although canned food products can storage longer than other food products.

1.3 Research Objective

This investigation is conducted three objectives. There are

1. To study the relationship between promotion and purchase decision toward canned food.

2. To study the relationship between price and purchase decision toward canned food.

3. To study the relationship between nutritional value and purchase decision toward canned food.

1.4 Research Question

There are 3 question needed to examine the analysis.

1. Is there relationship between promotion and purchase decision toward the canned food?

2. Is there relationship between price and purchase decision toward the canned food?

3. Is there relationship between nutritional value and purchase decision toward canned food?

1.5 Research Hypotheses

There are 3 hypotheses is going to study during the research.

1. It needed to be tested whether the promotion offer to the consumers will influence the consumers to purchase the particular brand products.

2. Price is to shows how many will the consumers purchase in the lower price (grand sale) and how many will consumers purchase in the normal price.

3. How important of the nutritional value will influence the consumers to purchase the particular canned food.

2.0 Literature Review

2.1 Consumer Purchase Decision

According to Consoh (2009) mentioned that there are two kinds of purchase decision need which include functional needs and emotional needs. Functional needs describe that the product provide the service which satisfy the consumer while emotional needs is related with the psychological aspect of product itself and the products may produce emotions but also bring good functionality (Consoh, 2009). But Engel, Blackwell and Miniard (1995) stated that the model of consumer purchase decision is the most recognized in the market which has 5 stages. There is problem recognition, gather information, alternative evaluation, purchase decision and post purchase behavior. Moreover, Engel et al. (1995) also identified three factors that influence the consumer purchase decision making which are personal, psychological and social. Conversely, Bettman (1979) argues that consumers made their purchase decision depend on the simple strategies than going through a series of logically processes or steps.

Customer decision making has describe as a mental orientation characteristic which affect the choice that consumer made (Sproles and Kendall, 1986). Sproles and Kendall (1986) had identified eight mental consumer’s decision making characteristic which included perfectionist or high quality awareness, brand awareness, new and fashion awareness, leisure and shopping awareness, price awareness, impulsiveness, selective confused and brand loyalty.

2.2 Canned food products

According to Rogers (2011) mentioned that canned food is first introduced in the 19th century to provide the convenience and easily prepare foods. Until today, the canned food products have more palatable than in the past (Rogers, 2011). It cannot be denied the convenience of the canned food products (Rousell, 2011). Moreover, canned food have the advantage of long shelf life and easy to carry and store but it have a bad image of being cheap, low-quality and loaded with sodium and preservatives in the customer perception.

2.3 Price decision

According to Schiffman and Kanuk (2004) discussed that customer make the decision of whether to purchase or not to purchase the particular brand or product is depend on price as fair or low or high. Customer will evaluate the particular brand or product whether the product or brand is worth to that amount of money. Jiang (2004) supported that the important element in the success of a firm is price.

Moore, Kennedy and Fairhurst (2003) mentioned that the negative perception and positive perception have a great impact on the decision making in the marketplace. Positive perception is consumers thinking the brand or product higher the price signal higher grade of quality, prestige and status except the price. Negative perception is consumers thinking the brand or product price equally to quality, price sensitive and grand sale.

Actually the value of money is the important factor when making the purchase decision. According to Creyer and Ross (1997) stated that when the demand for the products increases which mean that the proportion of the benefit and costs will likely to increase, therefore, the value of money will increase too. The consumers are more favorable to purchase the most valuable products at the most reasonable or lower price than the products quality, fashion awareness and brand loyalty (Creyer and Ross, 1997). Through the investigation of the product between price and quality, the results show that major consumers tend to choose the lower price products with a high quality value rather than choose the higher price products with a warranty best quality option (Creyer and Ross, 1997). In additional, Bucklin et al. (1998) supported that price awareness is the most important factor to affect the consumer purchase decision.

Consumer will switch to buy the products which having a discount price although that the products may not be their favorable choice or usual requires (Bucklin et al., 1998). According to the Monroe (1973) mentioned that price expectation is useful to help the consumer to purchase the products. Normally, the price expectation act as reference point to compare with other groceries price and make the purchase decisions.

2.4 Promotion

According to Heilman, Lakishyk and Radas (2011) stated that consumers nowadays are bombarded with all kind of promotions. Vlanchvei et al. (2009) explained that promotions are significant to gain more profitability of the products than advertising. The promotions included products trials, free samples and free gifts (Peattie, 1998).

Conversely, Smith, Berry and Pulford (1998) described that sales promotion divide into two main categories. There are consumer promotion such as premiums, gifts, competition and prize, eg. On the back breakfast cereal boxes and trade promotion such as point-of-sale materials, free items and etc. But, Rizvi and Malik (2011) stated that free samples, winning contests, different price pack and sweep stakes are in the category of consumer promotion. Sales promotion is significant element to increase the sales of the product (Rizvi and Malik, 2011).

Through the study, Pauwels (2002) stated that affect of the sales promotion for the storable and perishable products are short live which only can persist on average 2 weeks and at most eight weeks. It due to these two categories product: storable and perishable are lack permanent effect of sales promotion. According to Kempf and Smith (1998) stated that product trial is allow the consumers to determining brand beliefs, attitudes and purchase when the consumer first trying to use the products. After the consumers use those products, they will evaluate the products whether positive, negative or ambiguous ro affect them become loyalty consumer to the products (Washburn, Till and Priluck, 2000).

2.5 Nutritional Value on the Food Label

Food label is important to every food product because it providing the information that relevant to the food to influence consumers choice to purchase. Food labels include size, colour, images and informative text to the products (Hawkes and World Health Organization, 2004, p. v; Mintel, 2003, p. 11; Rettie and Brewer, 2000; Wandel, 1997). Furthermore, food label will attract the attention of the consumer to the products and providing the information that different from the competitors (Solomon et al., 1999).

Moreover, Wandel (1997) mentioned that the main ingredient that put into the food had to list down on the food labels with the additives and condiment too. The nutrient that contain on the food often provided on the food label. According to the Shannon (1993) mentioned that in the data of research shows that the consumers do not able to gain full advantage or knowledge of information on the food label.

Nutritional information provides the knowledge to the consumers who care about the food nutritional value. In the Food and Drug Administration (FDA) (1998) mentioned that the nutritional information on the food label is to allow consumers to take a variety of foods, keep the healthy weight, choose a diet with low saturated fat and cholesterol or with plenty of vegetables, fruits and grain food, and use moderation of sugar, salt or sodium. Nutritional information is important to affect the consumer decision making (Prathiraja and Ariyawardana, 2003).

Lynn (2011) stated that nutritional value will not lose in the canned food although the taste and texture of canned food maybe not similar from the fresh and frozen food. Consumer will read and compare nutritional information with consumer dietary target and decide whether to purchase or not (Lynn, 2011). The canned food products not only offer the convenience but also nutritional value to the consumer.

In additional, Kapica and Weiss (2012) stated that the nutrients that contain the canned food products are same with other fresh, frozen and dry food. Bruso (2011) explained that some food vitamin C will lost in the canning but major of lost vitamin C will shift to the sauce. Moreover, certain nutrient in the canned food is easy for the consumers’ body to absorb rather than fresh food (Bruso, 2011). Barbara and Rhonda Kaletz (1997) in between one to two years of storage the canned food, the amount of mineral, fiber or vitamin will not change or lose in the canned food products.

2.6 Safety of Canned food

According to Barbara and Rhonda Kaletz (1997) mentioned that canned food products is the safest products since the high heat process of prepare the canned food was used for many years in the purpose to kills microorganism which will cause food borne illness. Moving to the success of the canned food process is needed the quick heating methods, high temperature, integrity of the can and its conductivity (Barbara and Rhonda Kaletz, 1997). Therefore, the news about consumer illness which related to the canned food is seldom and the canned food can store at least two years.

Lynn (2011) stated that consume the canned food will not likely to get illness due to the canned food is safe to eat right out of the can and does not need refrigeration to store which canned food prepare in the condition of health benefit of commercially processed. Unsafely handling the canned food or during the cooking time, it will results food borne illness after consume the canned food.

In the United States Department of Agriculture (2003) noticed that consumers should always checked the package or can product to ensure there are complete product without break or opened when purchase fresh, packaged or canned food product. Consumers should always take the advice from the label which packaged with safety seals, not consume the products’ seal has been broken (United States Department of Agriculture, 2003). Furthermore, consumers should not consume the unsafe canned food when the cans are leaking, cracked, bulging, bad odor, dented or discolour food (Bruso, 2011). Although the canned food offer the convenience to the consumer but when the cans shape is not similar to other cans like dented or broken it refer that the canned food cannot be consume. In addition, after the consumer purchase the canned food, the product should be store in a cool and dry place without damp (United States Department of Agriculture, 2003).

2.7 Storage period

Expire date is used to refer that the food have the best favour but not for safety purpose before the date that had printed on the canned, and usually the date will printed on the top or bottom of the cans (Gleason, 2011). Some canned food manufactures put “use by”, “sell by” or “best if used by” dates on cans. Kapica and Weiss (2012a) supported that canned food have a longer shelf life than fresh and frozen food, this will assist housewife to save money, wasting food and not trouble about spoilage problem when prepare the meal.

3.0 Methodology

3.1 Introduction

In this research is to investigate the customer purchase decision toward canned food product in Kampar. This research is attempted to examine the study of price, promotion and nutritional value toward canned food. The method that uses to collect the data is quantitative methods. For the target customer that would investigate is between 20 to 50 years old with the target amount of 30 people.

3.2 Research Design

The method or sampling that I will go to use is online questionnaire which is one of the categories in quantitative. The questionnaire was divide into few section…

Section A

1. Perfectionists

I make a special effort to choose

the very best quality products

In general, I usually try to buy

the best overall quality

When it comes to purchasing

products, I try to get the very

best or perfect choice

Getting very good quality is very

important to me

My standards and expectations for

products I buy are very high

brand conscious, “price equals quality”

The most advertised brands are

usually very good choices

I prefer buying the best selling


Nice department and specialty

stores offer me the best


The higher the price of the

product, the better the quality

recreational and shopping conscious

Going shopping is one of the

enjoyable activities of my life

Shopping the stores wastes my


I enjoy shopping just for the

fun of it

Shopping is not a pleasant

activity for me

I make shopping trips fast

price conscious and value for money

I take time to shop carefully for

the best buys*

I look carefully to find the best

value for the money

I carefully watch how much

I spend

confused by over choice

There are so many brands to

choose from that I often feel


Sometimes it’s hard to choose

which stores to shop

All the information I get on

different products confuses me

The more I learn about products,

the harder it seems to choose

the best

Fashionable, attractive styling

is very important to me

I keep my wardrobe up-to-date

with changing fashions

I usually have one or more outfits

of the very newest style

habitual/brand loyal

Once I find a product or brand

I like, I stick with it

I have favorite brands I buy over

and over

novelty conscious

It’s fun to buy something new

and exciting

To get variety, I shop different

stores and choose different


1. Do you often purchase canned food?

What is your perception toward canned food?

What type of canned food do u often buy?

What factor that cause u to purchase the canned food?

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What Is Product Placement Marketing Essay


Product placement is defined as the practice of inserting brands in the script of mediated news and entertainment programs, also referred to as brand placement or entertainment marketing. (Hackley, 2006).

Product Placements are considered to be a relatively new type of advertising when compared with the traditional methods. After comprehensive reading, it can be safely assumed that very few studies have been conducted in Pakistan regarding product placements. However this study focuses on the consumer recognition of products which are placed within the broadcast mediums in Pakistan.

This study signifies what type of product placements are recognized by the consumers which means that whether prominent product placements have a higher consumer recognition or does subtle product placements have a more significant recognition.

The study revolves around the work done by DLR van der Wald in 2005 and in 2007


Moster (Moster et al, 2002) states that a product or a brand can be exposed to millions of customers at a single time through product placements via the broadcast mediums. Product placement is new type of marketing strategy which helps a product to communicate with its customers and a rapid growth can be witnessed by adapting this strategy. Marketers believe that if a product is used by famous celebrities or stars in a movie or a television show or if the product is endorsed by them, then the audience might be able to relate with the products on a more personal level through emotional persuasion. As stated by the MD of GroupM, Mr. Perwani, product placement is a relatively new and emerging phenomenon in Pakistan that has tons of growth potential

It has been specified by Russell (Russell, 2002) in his study that a product which is placed prominently in the screen plays a vital role in the recall and recognition of product placements especially in films since the total money which was spent on product placements during the year 2010 was more than US$14.5 billion (Morgan, 2011). With the advent of technological advancements and constant up-gradation of communication mediums, traditional advertising methodologies will become less impactful (Hornick, 2006). Product placement has its own advantages; the most essential ones being the deliverance of product message across a much wider domain; and greater endurance with low cost per exposure (Wiles & Danielova, 2006).

Recognition for products and brands can be considerably increased when viewers witness their placement not just on screens but also observe them in conversations (Berglund & Spets, 2003). Thus anticipation regarding products and brands can be increased through multiple sources for potential customers. Product placement is becoming an increasingly growing phenomenon in the marketing word. However, there is yet a lot to be explored regarding the subject and its validity (Gupta et al., 2000).

Products such as cigarettes and alcohol can be placed in the content of either the Film or the TV show which can give the viewer a more real experience of using the product. DeLorme & Reid (1999:2) in his study highlighted disadvantages of product placements which suggested that when it comes to traditional advertising, the marketers have full authority over every aspect of the communication while in the product placement process; the marketers have to depend upon the producers and directors or writers to include the product in their content or if the content portrays a negative unintentional message to the audience, then marketers will not be able to control the message and damage control would be difficult.

Problem Statement

It is very difficult to measure the effectiveness of content integration and till this date, not one universal method is used to measure the effectiveness of content integration. Lamb et al (2004) stated in his research that effectiveness of advertisements can only be measured by recognition. Various organizations use their own models to rationalize the effectiveness of content integration which is why we intend to bridge the gap by ascertaining the consumer recognition generated by product placements in the Broadcasted Programs of Pakistan.

There are both local and international programs which are broadcasted in Pakistan and there is no universal formula which calculates whether products which are placed in local programs have higher consumer recognition than those products which are placed in international TV shows and movies. Thus this research also revolves around which product placements have higher consumer recognition

This research is restricted to respondents residing in Karachi, Lahore and Islamabad and the limitations are further explained in the study.

Purpose of Study

Gupta et al (2000) stated that a few studies exist on product placements and the ones which are published often conflict with each other which results in unexplored issues and the need of further validation and generalization arises thus a need for further research on product placements exists which might be able to benefit the marketers globally as well as domestically.

Hence, the basic purpose of our study is to find out the consumer recognition for different brands which were used in product placements. Not a lot of researches have been conducted regarding product placements in Pakistan. Very little consumer reactions to product placements have been tested in Pakistan which used various different models.

Another reason why we are conducting this study is to find out whether product placements in the Pakistani broadcasted programs contribute to the brand recognition a customer/viewer has and whether he/she was able to recognize the branded product names placed in the programs.

Literature Review


Moster (Moster et al, 2002) states that a product or a brand can be exposed to millions of customers at a single time through product placements via the broadcast mediums. Product placement is new type of marketing strategy which helps a product to communicate with its customers and a rapid growth can be witnessed by adapting this strategy. Marketers believe that if a product is used by famous celebrities or stars in a movie or a television show or if the product is endorsed by them, then the audience might be able to relate with the products on a more personal level through emotional persuasion. As stated by the MD of GroupM, Mr. Perwani, product placement is a relatively new and emerging phenomenon in Pakistan that has tons of growth potential.

It has been specified by Russell (Russell, 2002) in his study that a product which is placed prominently in the screen plays a vital role in the recall and recognition of product placements especially in films since the total money which was spent on product placements during the year 2010 was more than US$14.5 billion (Morgan, 2011). With the advent of technological advancements and constant up-gradation of communication mediums, traditional advertising methodologies will become less impactful (Hornick, 2006). Product placement has its own advantages; the most essential ones being the deliverance of product message across a much wider domain; and greater endurance with low cost per exposure (Wiles & Danielova, 2006).

Recognition for products and brands can be considerably increased when viewers witness their placement not just on screens but also observes them in conversations (Berglund & Spets, 2003). Thus anticipation regarding products and brands can be increased through multiple sources for potential customers. Product placement is becoming an increasingly growing phenomenon in the marketing word. However, there is yet a lot to be explored regarding the subject and its validity (Gupta et al., 2000).

What is Product Placement?

Product placement is defined as the practice of inserting brands in the script of mediated news and entertainment programs, also referred to as brand placement or entertainment marketing because of its transformation from films to television shows and radio broadcasts, books, songs, stage plays and computer games (Hackley, 2006).

Product placement is the practice in which firms tend to devote vast resources to place branded products (e.g. brand name/logo, package, signage, and other trademarks) in mass media programming (Graser, 2006). However, the paradox of product placement cannot be ignored. “If you notice it, it’s bad. But if you don’t notice, its worth- less,” (Ephron, 2003). In other words product placement comprises of an advertiser or company producing some appealing content in order to sell something (Falkow, 2010).

In integrated marketing and advertising product placement continues to grow in importance with advertisers pushing their way into content far more aggressively (Ewoldsen, 2007). As a marketing tool product placement has one main advantage, due to its captive audience the product that is being placed is viewed avoiding clutter (e.g. other advertisements) (Dunnett, 1996). Product placement as argued by many scholars was first practiced after the invention of motion pictures and the commercialization continued through the twentieth century (Newell, 2006).

Branded Entertainment and Product Placement: A common Phenomena

Branded entertainment involves embedding advertising inside the content of television, radio programs and movies by placing products in important scenes or making brands intrinsic elements of plot lines (Kramer, 2005).

FBC Media further elaborates this definition. Branded Entertainment is a means by which a brand can have a deeper relationship with a program property beyond traditional media activity. It is where a brand creates entertainment that would not have existed without that brand, and where consumers choose to be involved.

Product placement is defined as the intentional usage of a third party’s intellectual property right in any non-commercial communication space designed for entertainment that helps in establishing a trademark and also serves as a source of income for movies and television production (Bramm, 2007).

Through television programming and cross-platform extensions, brands are reaching consumers by association with the program’s values – where those values are specifically developed to be consistent with the values of the brand. Hence an optimal branded content would use entertainment as a gateway to consumer dialogue leading to engagement on multiple platforms and off air as well thus creating and using it as a social currency.

Branded programming play’s a significant supporting role for traditional advertising as long as the cost efficiency ratio is maintained. Product placement has evolved over the years and transformed into branded programs which has a lot more than only brand placement in the show i.e. brand essence, brand values, brand talkies. Hence, branded entertainment is about bringing a brand to life by providing entertainment and a feel of the brand to the target audience.

History of Product Placement

The history of product placement dates back to 1945 when it was first used as a tool of promotion. Joan Crawford, the actor sipped Jack Daniel’s whiskey prominently in the film Mildred Pierce (Reed, 1989). Later in the year, 1951, the producers of the film “The African Queen” were paid by the makers of Gordon’s Gin to have a brand of liquor placed in the film. In 1982 “E.T.” was used so skillfully to promote Reese’s Pieces candy, that sales of the product jumped by 65% during the month of release (Business week, 1998). After this huge success, brand placement in feature films became an essential part of consumer marketing (Reed, 1989).

Another success of product placement was witnessed in the year 1997 when Will Smith & Tommy Lee Jones wore Ray-Ban Predator 2 sunglasses in the movie called Men in Black, the sales of the Ray-Ban glasses tripled to almost $5 million according to the company. This proves that product placement indeed influence the sales of a brand (Basset, 2000).

Product placements in movies are nearly as old as cinema itself (Turner, 2003; Newell, 2004). It involves placing a product or a brand into the script of a film scene where it can be noticed by the viewers. In most cases, the placement is paid by the advertiser (Karrh, 1998). In 2002, Ford paid around 30-40 million dollars to position Aston Martin cars in the movie Die Another Day (2002). Conversely, Virgin Cola did not pay for the placement of its product in (La Boite, 2001) but instead, offered complimentary products to Claude Zidi, the director of the movie (Lehu, 2006).

The positive effect on attitude (Fontaine, 2005), behavior (Daugherty, 2005), and the density of impact on brand recall (Dubas, 1999; d’Astous, 2000) signifies the foundation of the research knowledge. Hence, today’s advertisers are exploring opportunities to represent their offerings to their target audience in the most constructive form, product placement seems to be appropriate (O’Reilly et al., 2005), and since it is cost effective as compared to a 30 second TVC (Jaffe, 2005), it is more commonly implemented.

Authors characterize product placement according to three categories; prominence, audio visual and plot placements. Prominent placement is defined as a placement in which the product is highly visible due to the size or position on the screen (Gupta, 1998). Audio visual is described by the appearance of the product on the screen or as the product being talked about in a dialogue (Russell, 2002) and plot placement is the extent to which the product is included in the story plot (Russell, 1998).

Product Placement in Movies and Television Programs

Product placements in movies are of two types: Creative & On-Set Placement. When the brand is placed into the screen in clever ways, it is considered to be creative. Zaie’s logo on a park bench in the movie “Back to the Future” is the perfect example of creative placement. Conversely, on-set placement is when the product is showed in a neutral situation, for example, Tide detergent being placed on top of the washing machine, in the movie Mr. Mom (Oliver, 1986).

Product placements can create strong loyalty and also affect style and trends for years after the film is released (Yorks, 1989).

One of the most important benefits associated with product placement is its lasting life and wide reach of the message with lesser cost per exposure. Product placement in films are mostly paid but hidden messages including the product name, the product itself or the firm’s name is aimed at the audience through product identifiers through audio or visual means of promotion (Balsubramanian, 1994).

An idea was stated by (Russell, 1998) to show how product placements are important in the context of the imaginative engagement of consumers with their favorite broadcasted programs and celebrities. The idea proposed that the experience of using/consuming a product can be changed with the help of product placement in films or television programs. When real products are placed in broadcasted programs or movies, the authenticity and salience of the brand is strengthened which increases empathy towards the product (Russell, 1998).

Product placement makes visual aspects of films more realistic and credible which greatly facilitates viewers’ memory (Russell, 2002). There are various ways to feature a product in films. The product can itself be displayed, its logo can be shown, or even an advertisement of the product can appear in the film (Smith, 1985).

Product placements which come under the integrated marketing communications strategies intensify the impact of overall communications done by the brand. It relates to the consumer on a more personal level which then enhances the chance of product recognition (Beard 1996).

Television programs and movies can be regarded as valuable projective function for consumers: audiences of television programs and movies enter into new worlds through dramatic entertainment which the video is providing. When brands are placed in this fantasy world, consumers are able to connect with them (Hirschman, 1982). A few essential reasons why marketers starting focusing on developing innovative placement techniques were: advertisement clutter produced by television commercials as a consequence of greater time allocated to advertisements with lesser durations per commercial; and inability to defragment audiences because of increasing number of television channels (Gupta, 1998).

Significance of Product Placement in comparison with Advertising

In an interview with Jean-Marc Lehu (Jean, 2007), he highlighted the fact that the viewer ship of a prime-time 30 second commercial is declining each day and the audience profiles are even more difficult to predict. In 2007, two major players in the FMCG sector namely Procter & Gamble and Unilever opted out of airing commercials during the February Superbowl in Florida- a mega event hosted in US. Due to the wide spread of entertainment, managers have adapted an attractive strategy known as branded entertainment. Product placement provides an opportunity to deliver the message of the brand; at times the audience not being aware of the intention of the advertiser. In comparison with advertising budgets, product placement is cost effective.

Product placement proves to be a very important marketing tool, which in turn is used to compliment various other marketing and advertising tools. It helps marketers to emphasize and strengthen brand awareness. Product placement can be further distinguished into Real placements and Virtual placements. The former requires the participation of film actors and actresses and are essentially associated with film production. The latter utilizes digital technology using an audio – visual segment processes (Balasubramanian, 1994).

According to Beglund (2003), product and brand placements on television and in conversations increase the probability of greater product and brand recognition, which in turn results in customers absorbing more information from various sources. Product placement is increasingly gaining popularity in the marketing world. However, it still requires comprehensive product related research. Therefore a number of issues remain unclear which require exploration and further validation (Gupta et al, 2000).

The nature of product placements in media recognition depends significantly on subjectivity (D’Astous, 2000). Brand recognition by the customer can be increased by using an effective marketing and communication tool (Beglund, 2003). To measure the effectiveness of advertising, recognition tests are commonly used.

Product placement is remarkably replacing traditional marketing tools and strategies based on its ability to communicate product message across potential customers over much wider domains. Where traditional marketing tools failed to do so as a result of increasing advertisement clutter, product placement has proven to be an effective alternative to such approaches (D’Astrous, 2000).

Product placements have given marketing communication tools a new approach which is more flexible, efficient, feasible and innovative. The systematic mechanism of communications is to reach out to the target audience and remind them about a certain product or service in the market. Product placement informs and reminds the consumer about a particular product or service made by a specific brand (Eagle et al, 2000).

Consumers often prefer product placement to advertising because the attitude towards product placement is generally more positive than advertising or television commercials (Nebenzahl,1993).

Realism in television programs and movies is increased through product placement since it involves consumers on a more personal basis if compared with advertising because product placement is mostly discreet when compared with other tools of marketing (Gupta, 2000, d‟Astous, 1999; Karrh, 1998). The industry of advertising classifies product placements into three categories. First category includes a logo, brand or brand name being seen in the background or the character holding the brand. Second category is when the character uses the brand while the third category involves the character voicing the brands name (Kinsley, 1990).

The messages communicated through product placements diverge from the conventional tools of marketing communication since they are incorporated into the content. These communication messages tend to be more subtle which makes them more realistic rather than advertising. Also, messages communicated through product placements are less pressurized than those communicated through advertising (Grigorovici, 2004; Karrh, 2006; Meenaghan, 2001). Due to brand placements, transformational advertising which involves the experience of using/consuming the brand might occur. This type of advertising makes the use of brand much more enjoyable if compared with a conventional television commercial. Consumers can always relate to this type of advertising and recalling the brand through the experience generated by the placement is always better (Puto, 1984).

Psychologist in their experiments found that the individuals organized their incoming information into a coherent pattern designed to aid retrieval which resulted in individuals recalling information in terms of categories or clusters meaning product categories would recall more easily than specific brands (Bousfield, 1953).

Product Placement: A Global Perspective

Over the years, the utility of product placements has received substantial importance in Africa (Van, 2005; Du Toit, 2004; Du Preez, 2004; Nunes 2004).

According to a study on politics of product placement in the European Union (Haifa, 2008) technological advancements and extensive competition commercially such as Multi channel TV and Internet broadcasting are remarkably changing the advertisement market globally.

For commercial broadcasters Product Placement has become the main source of revenue instead of spot placements. Product placement is a tool whose sole objective is to promote a service or a product with the main commercial message enclosed within. The reality, which rivals commercial media, is supplemented by a decrease in popularity of traditional television e.g. “spot ads”. In spot ads advertisements are broadcasted in a separate closely monitored environment.

Four major forces that are instigating change now challenge these arrangements. Firstly the creation of a digital revolution introducing hundreds of TV channels into viewer’s homes leading to the creation of a fragmented audience divided amongst many niche channels, therefore making it very hard to target the audience with a same spot advertisement (Russell, 2005; Tiwsakul, 2005). Secondly new recording machines makes skipping advertising spots possible (Schejter, 2007; Wenner, 2004). Thirdly the Internet serves as a medium for advertising that attracts advertiser’s attention and budgets and lastly the rising cost of advertisements proves to be a major concern for advertisers (Avery, 2000), However the threat of undue influence remains.

Product Placement: A Deceptive Tool or a Modern Advertising Technique?

Product placements create and increase brand awareness but no association has been found yet that it also influences the brand attitude. Product placement might influence the brand category of which product to use if the consumer has a category need (Babin & Carder 1996, 150; Brennan et al. 1999, 334).

Since the message is hidden the viewer’s find it hard to distinguish between commercial and editorial content therefore product placement is referred to as a hybrid message (Balasubramanian, 1994) and it is claimed to raise a question of deception (Avery, 2000). Product placement is a selected message aimed at misleading the audience about their control over content Schejter. The audience is usually mislead about the intent of the placement this matter is however raised in two public concerns firstly minor protection because the placement is not clearly identified as an advertisement and secondly to protects the audience against harmful to health content (Baerms, 2003; Wenner, 2004).

According to Al Ries and Laura Ries, traditional advertising has lost its credibility (Ries, 2004) as the traditional advertising is mere distraction for the viewers and consumers and hence, don’t want to watch the ads. Sergio Zyman claims that the marketing and advertising tactics have changed drastically from the past and Joseph Jaffe further explains why the traditional 30-second spot is not very significant which leads to the advent of non-conventional advertising techniques that is product placements. The non-conventional ways will be more engaging and involving than a traditional ad which is thirty seconds. The non-conventional ways could be any and everything beyond a 30 seconds spot (Jaffe, 2005).

Product placement provides an extra mileage to the brand and added exposure with the traditional advertising. Product placement is there on screen and therefore in the minds of the consumer without distraction. It’s something which can’t be avoided while watching a specific program. In the United States alone, the number of product placements on television increased by 30 per cent in 2005, to reach 108,261, according to Nielsen Media Research. It is for such ratings that firms spent more than US$14.5 billion on product placements during 2010 (Spurlock, 2012).

Mehr Sultan stated in her thesis that, even in Pakistan “in-program” exposure is a lot more valuable to advertisers than mid break spots and break bumpers. For example in Lemon Max Bar’s case an animated logo placement in a show on PTV Home, called Baharaai. The GRPs attained during the show by onscreen animation consisted of 13% of the overall GRPs attained from exposures (Medialogic, 2009). The on screen animations or scrolls are a must see since they are shown during the program, whereas exposures during mid-break do not guarantee complete viewer ship as the attention span during mid-breaks declines (Mehr, 2009).

Practitioners see product placement is a cost effective and precise way to communicate your brand’s message to the specific target audiences and market segments (McKechnie, 2003).

What is the logic behind product placement, and what makes it work. The basic idea behind modern advertising persuasion is that if you want to sell your product, then you want to have social leaders be seen using it. Thus, selling soft drinks to teenagers, you might tailor your advertising to the leaders among the “mooks” and “midriffs” mentioned in the Frontline documentary “The Merchants of Cool” (Goodman, 2001).

You might use Led Zeppelin’s music to lend an air of excitement to a Cadillac that only the most successful consumers can afford to buy, because most peak earners today were in their teens during Led Zeppelin’s heyday 3 decades ago. Product placement puts things into hands of leaders (Bovard, 2005). If we look at the local scenario in Pakistan, Zubaida Tariq endorsed P&G’s leading product Ariel. Pakistani housewives look up to her in various aspects of life.

Branded shows have one considerable advantage: their length, which the ‘infomercial’ sought to re-establish in the late 1980s. In the case of a sponsored show, it is possible to escape the straitjacket of the 30-second advertising spot. Not only are these few seconds of screen time expensive, but also it is sometimes difficult to make the consumer understand how a product is used, or what its benefits are, in such a short space of time. Customer awareness and brand attitudes can be increased by product placement as supported by ample evidences (D’Astous, 2000; Gupta, 1998).

For technological goods, product placement offers the following advantage:

1. During a film or a television series, it is possible to place a product in the hands of a character and show explicitly how it is used.

2. For both a series and a film, it is also advantageous to be able to use the latest fashionable gadget or to benefit from the latest technological advances, sometimes even before the product has gone on sale, as was the case with the very latest Nokia mobile phone used in David R Ellis’s film Cellular; or with the telephonic video security systems designed and built by Cisco and visible in the television series.

Another advantage of product placement is that, to date, it cannot be avoided and it is visible in almost all the possible shots.

DeLorme (1999), Blech (2001), and Fill (2002) emphasized various benefits associated with product placements, most essential ones being: product acknowledgement; and life span as well as frequency of the film placement. Celebrities using specific products in films have a greater impact on viewers which subsequently increases product acknowledgement.

Classifying products into various categories, utilization of a product itself, or associating the product visually with films may strongly influence the recall factor for such products (Dodd, 2000). Other advantages of product placements are: it increases familiarity and salience of the product; and increases product awareness (Aaker, 1996).

Product Placement and Ethics

According to the study (Hackley, 2008), it has been determined that the potential for an ethical regulation of product placement depends on two major components: (1) the degree to which producers, media agencies and brands make their product placement strategies explicit to the target audience, and (2) the level of commercial complexity, which regulator attribute to non-expert entertainment viewers.

One of the key concerns of product placement is that consumers believe it to be a subliminal or subconscious promotional effect (Gupta, 1997; Morton 2002). Another criticism that follow considers product placement as a deceptive practice since it convinces people to make purchase decisions based on influencing factors involved in the process (DeLorme,1999). Also, objections on ethical principles of product placement as an implied promotional tool have been voiced regarding specific categories. Children are seen as a primarily vulnerable segment when it comes to product placement mainly because they do not possess the ability to understand the intensity of such subtle promotional technique (Avery, 2000). Despite the fact that children below the age of 10 years are not fully responsive towards the commercial motive of conventional advertising, their recall initiates as soon as conscious awareness occurs (Gupta, 2000).

Product placements for products that have an adverse perception or an ethical charge, fail to deliver a constructive message regardless of how positive the emotion in the content is. Consumers tend to ignore placements of such products which results in the cancellation of a positive transformation of product perception (Gould et al 2000).

On the basis of various studies, PQ Media agency calculated that for the United States, investments in product placement in the media had risen from US$190 million in 1974, to US$512 million in 1985 to US$1.130 billion in 1994 and it reached US$3.458 billion in 2004.

Cinema’s share decreased due to the explosion of placement opportunities on television because of continuous growth in reality TV shows. Expenditure on product placements for media other than films and television was estimated at US$384.9 million in 2005 (or an increase of 18.1 % over 2004). Based on an annual growth rate fixed at 14.9%, the projections of the experts at PQ Media foresaw that expenditure on product placement in all media in 2009 would be US$6.94 billion. Among the leading sectors, analysts believe that transport and accessories, clothing and acce

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Measuring national income and its impact on standard of living


National income is a very basic concept in macroeconomics about which we should how much output our economy is producing over a given period of time. National income statistics give us much information about how a nation’s economic growth and related objectives such as: quality of life, standard of living of one country compared to another. In this essay, I have a closer look in measuring national income and its significance on a nation’s well-being.

National income, as known as Gross Domestic Product (GDP), is the money value of total goods and services produced within a country over a twelve-month period. This annual figure is very helpful to the economists to track the economic growth’s rate, average living standard in one country as well as the distribution of income between different groups of population (i.e. inequality gap). Three major components of national income accounts are: output, spending expenditure and income; which respectively represent three methods of measuring GDP. We will study these three methods in turn and consider which factors should be taken into account to achieve accurate figures.

Firstly, GDP value can be measured by adding up the total final value of goods and services that are manufactured within an economy, industry by industry using the concept is value added. Value added is defined as the increase in the value of a product at each consecutive stage of the production process. The reason for this approach is to avoid the problems of double-counting the value of intermediate inputs. To the best of my knowledge, there are three productive sectors in an economy: primary (agriculture goods), secondary (manufactured goods) and tertiary (services), quaternary (research and development). There has been a strong increase in volume of output in the tertiary sector. The table below illustrates how the recent data has contributed to a structural change in the economy.

As we can see from the table, the gross value added figure of mining and quarrying and manufacturing has observed a continued decline in output from the period of five years (2001-2004) whereas distribution, hotels, catering together with business services were enjoying a strong growth in total production. So far, the largest share of total national output (GDP) comes from our service industries. Noticeably, there have been divergences created between secondary and tertiary sectors of the British economy. In fact, the service area has made a speedy jump over the past decade compared to manufacturing trend line which is quite gradually fluctuate until 2006, shown in the chart below:

Second, we can also generate national income level by adding up total incomes of each individual household from production in form of wages, salaries, profits, rents and interest. It is important to take notice that only those incomes that are actually generated from production activities count for the GDP calculation. By that we have to exclude: Income that is not registered with the Inland Revenue or Customs and Excise (underground economy earned income), transfer payment from Government (income support, unemployed benefit, state pension…) This is known as Factor income earned from firms method.

Following simple circular flow of income and expenditure between households and firms, the third method focus on all domestic expenditures and spending are made throughout the year to consume the nation’s production, also called aggregate demand. Assuming there is no injections and withdrawals interference, the value of all products sold must therefore be the value of what are produced. We use this expenditure method to calculate this sales value. The full equation for GDP using this approach is: GDP = C + I + G+ (X – M) where C is total consumption, I is Investment, G is Government spending, X and M imply Exports and Imports of both goods and services in international trade sector.

Moreover, either calculated by any method above, the figures outcome should generate the same amount as the following relation holds true: National product is equal to National Expenditure (Aggregate Demand) and equals to National Income.

General speaking, GDP can be regarded as an indicator to measure the size of its economy. When reading national income statistics or making sensible comparison of one year’s to another, we should take into account some factors that might influence the its accuracy. We have to adjust for inflation. For instance, if this year national income has gone 10 per cent higher than last year figure but meanwhile price level has also risen by 10 per cent, then the average person will be no better off at all. Real national income (income after inflation) should increase by a faster rate than that of inflation, hence intriguing a positive economic growth. What about population? GDP per-capita is a basic way of measuring average living standard for the citizens.

UK is a high-income country by international standards, however, its GDP per capita still not at the very and behind some countries like USA which is apparently a strong economy. We have known China – the third largest economy in the world and its currency have been said to likely overtake US dollars. However, in fact GDP per capita (GDP per head) of China is only 11 per cent than that of USA. We seem to be more interested in the output or income per head rather than the total GDP output figures. Besides, we face a big problem when comparing GDP figures of different countries due to exchange rates. But exchange rate might be a poor indicator of purchasing power of the currency over other countries. Let’s say £1 in UK may exchange for 30,000VND (Viet Nam currency) but no one can guarantee that £1 can buy the same amount of goods as 30,000 in Viet Nam, more or less. Luxembourg obviously has lower level of national income than UK but in the chart, its GDP per capita leads the other countries. Thus, the European Commission publishes the purchasing-power parity rate as a common currency to convert GDP.


To some extent, after taking inflation, exchange rates and the size of population, GDP is quite useful in measuring level of income within one nation, provided that we are clear about distinctions of different measures. However, when it comes to living standard or welfare of the inhabitants, it is not necessarily true that we take GDP figure as a perfect key indicator and rely exclusive on it to measure one country’s well-being as it involves many other problems. To understand the relationship between national income and living standards, we define living standards as material welfare of the inhabitant in an economy. The basic measure of the standard of living refers to per capita real GDP. It is found by dividing real GDP by the size of the population (Geoff Riley, Eton College, September 2006)

The underground economy is a big pain that economists might experience when trying to find the precise rate of growth of national income/output. They might either underestimate or overestimate the level of all economic activities taking place every day. The underground economy comprises of illegal and unclaimed transactions. These transactions could be illegal productions/ consumption of illegal goods such as drugs, weapons, prostitution, or sometimes people hide money earned transactions from authorities for high tax purposes and avoid losing benefits. A shop would be more pleased to receive cash from customers in order to avoid VAT. A person does extra evening job but does not declare his income, known as “moonlighting” In this case, the loss of national income from production of output becomes out of control. In addition, using production of output may be a poor indicator to determine nation’s well-being for some reasons. Firstly, because production involves externalities and social costs such as: pollution, problem of global warming, human costs. GDP ignores these external costs and only record the rapid growth in the national statistics. Some production of bad causes also lead to an increase in total expenditure hence raising GDP. More serious crime commitment in the society result in more expenditure on security enforcement, rise in illness will lead to an increase in health care service, so on and so forth. These undesirable effect may literally pull up the GDP. On the other hand, the distribution of disposable income is not considered in GDP when inequality gap problem might arise. GDP per capita of some classes of society probably rise but making others worse-off. By this we mean GDP information is not adequate and reliable enough to determine one nation’s welfare.

On the other hands, there are various aspects of life we should put high priority if we desire to gain high living standard and happiness of citizens. By providing more access to clean water and sanitation services, internet supply, and subsidising education support for poor children, less environmental issues, reducing inequality gap between the rich and the poor, improvement on working hours and conditions of labour, we aim at greater self-sufficiency economy and balance between both materialistic and spiritual life for residents. According to UN water expert Brian Appleton:”The equivalent of 12 jumbo jets of children die every day from sanitation-related diseases”. The commission says that everyone could have clean drinking water and improved sanitation facilities within 25 years if governments made water provision a priority.”, as from BBC news (2000).

To conclude, it does not mean we can reject or rely completely on the GDP figures as a means of judging economic performance. Although GDP statistics cannot express to be a good tool of measuring economic health, they are still effective measurement of output and income.


John Sloman & Alison Wride, “Economics”, seventh edition, (2009), Pearson education.

Geoff Riley, Eton College, September 2006, revision note from

Available at:


Wikipedia: available at:

‘Billions without clean water’ (March 2000) Available at:

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According to mankiw and taylor



According to Mankiw and Taylor (2006), unemployment means that inability to obtain a job when one is willing and able to work. Even though there are several different ways to measure unemployment, this can be normally measured in two ways: the claimant count and the Labour Force Survey (LFS).

Grant (2000) states that the claimant count is the traditional measure of unemployment in the UK. The number of people between the ages of 18 and 60 claiming unemployment benefit payments such as job seekers’ allowance from the government is counted as the claimant count. Therefore, it is relatively cheap and easy to gather data. However, many economists believe that there are some significant problems with the claimant count method because of the accuracy of this measure. Powell (2005:p.290) tells us, “the claimant count overstates true unemployment because many claimants are either not genuinely looking for work or not genuinely unemployed because they already have undeclared jobs in the informal economy”. In other words, some people who are working in the black economy and who are not looking for work are included in the claimant count. However, in other ways, it understates true unemployment. The rationale behind this is that the claimant count does not include unemployed people who are aged under 18 or over 60 or who do not claim unemployment benefits. Furthermore, some unemployed workers approaching retirement are also removed from the register.

The Labour Force Survey (LFS) is now recognised as the second measure of unemployment. According to Grant (2000), the LFS is also known as the ILO (International Labour Organisation) measure because it uses the ILO’s definition of unemployment. Contrary to the claimant count, all people who are actively looking for a job in the last 4 weeks are counted as unemployed workers whether they are claiming benefits or not.

Both the claimant count and the Labour Force Survey (LFS) have its own advantages and disadvantages. However, both measures might understate the actual unemployment. According to Powell (2005), the reason is that they do not count discouraged workers who have given up finding jobs and people who are classified as economically inactive.

Unemployment can be defined and categorised in a number of types and ways. Therefore, in this paper, it will be classified in accordance with its causes.

First of all, there is equilibrium unemployment. Grant (2000) tells us that equilibrium unemployment exists when the aggregate demand for labour is equal to the aggregate supply of labour and vacancies match with the number unemployed. However, although there is equilibrium at wage rate, people might still unemployed because the vacancies are uninformed to them or they are unacceptable or unwilling to take up the vacancies. The graph below shows equilibrium unemployment.

(adopted from Powell: p.293)

This equilibrium unemployment is measured by the distance between Z and X or E1 – EFE. In addition, ASLN curve shows all the workers who are willing to work at different real wage rates.

According to Grant (2000), there are different types of equilibrium unemployment such as frictional, search, casual, seasonal, structural, technological and residual unemployment.

Frictional unemployment occurs where people are between jobs. Because of immobilities in the labour force, a delay or time-lag is created while unemployed workers move from one job to another. Therefore, it explains why people are able to remain unemployed despite there are job vacancies available. Powell (2005) states geographical and occupational immobilities of labour explain why unemployed workers are prevented from filling job vacancies immediately. For example, the cost of moving and difficulties of obtaining housing are among the causes of geographical immobility. In addition, occupational immobility is caused by the need for training and the effects of restrictive practice and discrimination in labour markets.

Grant (2000) says that search unemployment is a form of frictional unemployment. The newly unemployed workers who have just lost their jobs or who have voluntarily left their jobs might take a gap before getting a new job. The reason is that they need to search labour markets to see better-paid or higher status employment is available. Therefore, search unemployment takes place when unemployed workers do not accept the first job offer to search for better-paid or higher status employment.

Some kinds of unemployment occur when certain groups of workers are out of work between periods of employment. According to Grant (2000), casual unemployment, one of the specific cases of frictional unemployment, takes place because of that reason above. In other words, casual unemployment occurs when workers are unemployed on a short-term basis in trades. For example, workers in the tourism sector, construction industry and agricultural work.

Powell (20005) states that seasonal unemployment is casual unemployment and it occurs in some industries suffering seasonal fluctuations in demand. Industries such as farming, tourism and building experience such seasonal patterns of demand. Therefore, fruit pickers and deck chair attendants can be an example of seasonal unemployment.

Besides, there is structural unemployment. People can be unemployed because of the changing structure of the economy. According to Powell (2005), structural unemployment arises from the structural decline of industries. For instance, if there are more efficient competitors in the market or there is the decline of demand, the workers in those industries will be becoming unemployed e.g. coal-miners in the UK. Further, he says that structural unemployment occurs when industries change their skill requirements. For example, industries ask new skill requirements when they change or introduce ways of producing their products.

Structural unemployment has some different forms like frictional unemployment. Technological, regional and international unemployment are forms of structural unemployment.

Technological unemployment is a form of structural unemployment. Grant (2000) say that technological unemployment results from the introduction of new technology such as labour-saving technology. Therefore, there will be automation as a result of introducing new technology. Through automation, industries can reduce their demand for labour even though their output is expanding. Accordingly, it can be defined technological unemployment results from those industries using labour-saving technology such as the use of telephone banking and plastic cards.

Like technological unemployment, regional unemployment is also connected with structural unemployment. Grant (2000) states that regional unemployment takes place when the declining industry is linked to a specific area. In other words, it occurs because of the decline or closure of a major employer in a particular area. For example, in the UK, the decline of textile and shipbuilding created a pool of unemployed workers in some regions.

According to Grant (2000), international unemployment is also a form of structural unemployment. It occurs when the demand for domestically produced goods and services falls and, consequently, there are increased workers losing their jobs. For example, if there are more efficient competitors abroad, consumers might choose goods and services that are produced out of the country. Therefore, the demand for domestically produced goods and services might decrease then firms will reduce their employees or will be closed.

Finally, there is residual unemployment as a type of equilibrium unemployment. Mankiw and Taylor (2006) state that residual unemployment takes place when people are unwilling to work or are not able to work due to disability. Basically, people who are unemployable on a permanent basis cannot meet the demands of modern production methods and the disciplines. Therefore, it can take place in all societies.

Disequilibrium unemployment is another kind of unemployment except for equilibrium unemployment. According to Grant (2000), there are two conditions for occurring disequilibrium unemployment. One is that the aggregate supply of labour must exceed the aggregate demand for labour. Another condition is that wages are sticky downwards (wage stickiness). The graph below shows that there is disequilibrium unemployment of LLZ at the wage rate W.

(adopted from Grant: p.536)

According to Powell (2005), there are two main types of disequilibrium unemployment: classical or real-wage unemployment and cyclical, Keynesian or demand-deficient unemployment.

Classical unemployment or real-wage unemployment takes place when wages are fixed at a higher real rate rather than real-wage rate and labour market, caused by trade unions or a government-set minimum wage, prevents the real wage rate falling below these higher wages. The graph below shows classical or real-wage unemployment.

(adopted from Powell: p.297)

If labour markets are sufficiently competitive, the market mechanism begins to reduce disequilibrium wage rate to eliminate the excess supply of labour in the market. However, labour market rigidity or wage stickiness prevents the real wage rate falling below W1. Because of labour market rigidity or wage stickiness, there is the excess supply of labour in the markets and, consequently, classical or real-wage unemployment persists.

According to Powell (2005), demand-deficient unemployment (also known as cyclical unemployment or Keynesian unemployment) stems from leakages or withdrawals from the circular flow of income and from the negative multipliers that are then unleashed. In other words, an under-full employment equilibrium occurs because of a continuing lack of effective aggregate demand. For example, the flow of income might fall by the size of the net leakage multiplied by the national income multiplier when planned leakage exceeds planned injections.

Powell (2005) states that demand-deficient unemployment illustrates the paradox of thrift. It comes from the fact that saving becomes a vice at the aggregate level if people save and others are prohibited from spending the saving. For instance, demand for goods and service reduces when the market is in the recession of business cycle below the trend. Therefore, firms do not need to produce many goods to satisfy decreased consumers’ demand so that less labour is needed. The lower the demand for goods and services, the less the demand for labour is needed. Consequently, firms will reduce the number of their employees then the unemployment will increase.

Powell (2005: p.299) tells us, “Inflation is best defined as a persistent or continuous rise in the price level, or as a continuing fall in the value of money”. Like unemployment, there are some methods to measure inflation: the retail price index (RPI), the PRIX, the RPIY and the consumer price index (CPI).

The retail price index (RPI) shows changes in the price of average person’s shopping basket. According to Powell (2005), the RPI was used by UK government to measure changes in the rate of inflation until 2003 and it measures the headline rate of inflation. The RPI is based on a monthly survey of the prices of consumer goods and services and it is therefore, calculated through a weighted average of each month’s price changes. However, it is impossible to measure all prices. Therefore, the RPI contains 650 items as a representative sample and those items are regularly changed to reflect new products and changing tastes. For instance, subscriptions for Internet service and digital cameras newly entered index compilation.

The RPIX is the retail price index excluding mortgage interest payments. Powell (2005) says that the RPIX measures the underlying rate of inflation. In other words, it is measured by the formula: the headline rate minus mortgage interest rates. The RPIX only includes the council tax while the RPI includes the council tax and the mortgage interest rate. Furthermore, it is used to measure the cost of living of a representative family in the economy as the CPI does.

Marcouse et al (2003) tell us that the RPIY is similar to the RPIX. However, it excludes indirect taxes as well as the mortgage interest.

The consumer price index covers the prices of consumer goods. It attempts to measure the cost of living of a representative family in the economy like the RPIX. The CPI includes investment goods and goods purchased by the government while the mortgage interest rate and the council tax are excluded from the CPI. According to Powell (2005), in the UK, the CPI will replace the RPI and the RPIX completely because it is based on the method of measuring the price level used in the European Union.

Inflation can be defined and classified in accordance with its causes. There are two different types of inflation: demand-pull and cost-push inflation and those two types of inflation are classified by Keynesians.

Demand-pull inflation is caused by too much demand in the economy. In other words, demand-pull inflation occurs when there is too much money chasing too few products. For example, oil and steel. According to Grant (2000), an increase in aggregate demand must rise real output and the price level once the country’s resources are fully employed. The graph below uses a short-run AD/AS diagram to show demand-pull inflation.

(adopted from Powell: p.306)

When the government rises aggregate demand from AD1 to AD2, the government can eliminate demand-deficient unemployment and create full employment although real output and the price level increase. However, once full employment arrives, a further increase of aggregate demand may cause an upward movement of aggregate demand, shifting the aggregate demand curve from AD2 to AD3 and then excess demand (the vertical distance between W and Z) is created. Although there are several different conditions causing demand-pull inflation, wartime might be an appropriate example.

The graph above also illustrates an inflationary gap which is the vertical distance between W and Z. Powell (2005: p.306) tells us, “An inflationary gap measures the extent to which excess demand exists at the full employment level of real income or output”. Similarly, a deflationary gap measures the extent to which there is deficient aggregate demand.

Cost-push inflation occurs as a result of a rise in the costs of production which are not caused by excess demand. Therefore, there is the difference between demand inflation and cost-push inflation. According to Powell (2005), cost theories of inflation are based on the cause of inflation in structural and institutional conditions on the supply side of the economy. Cost-push inflation is illustrated in the graph below.

(adopted from Powell: p.307)

An increase in cost will cause a shift in the aggregate supply curve to the left (SRAS1 to SRAS2). The effect of this is to raise prices from P1 to P2 and then the quantity demanded will move from Y to Y1. Therefore, the macroeconomic equilibrium will be moved from X to Z and, consequently, the new macroeconomic equilibrium will be at point Z.

According to Grant (2000), there are several causes in which costs might increase independently of the state of demand. First of all, wage push inflation can lead to cost-push inflation where trade unions force wages levels to increase independently of the demand for labour. Another example is a rise in prices of imported materials. Finally, a rise in indirect taxation also gives an example which leads to cost-push inflation.


(data for this graph adopted from the handout)

The graph above shows changes in retail price change and unemployment between 1986 and 1995. It can be clearly seen that there is the relationship between the retail price % change and unemployment rate and those are inversely related.

The retail price % change increased from 3.4% to 9.5% between 1986 and 1990. During that period, the unemployment rate decreased from 11.2% to 5.9%. However, once, the retail price % change reduced from 9.5% to 5.9% in 1991, the changes in unemployment started to raise from 5.9% to 8.1%. Between 1991 and 1993, there was a decrease in retail price change from 5.9% to 1.6% while the unemployment rate increased from 8.1% to 10.4%. However, by 1994, the changes in unemployment reduced again (from 10.4% to 9.3%) when the changes in retail price change increased from 1.6% to 2.5%. In 1995, the unemployment rate still decreased while the retail price % change increased.

The changes in retail price change was at the peak in 1990 when the unemployment rate recorded the lowest rate (5.9%) in the same year. In 1993, the changes in retail price change and unemployment are different. The retail price % change reached the lowest rate (1.6%) when the unemployment rate recorded the highest rate (10.4%) in 1993.

Overall, there was a decrease in unemployment rate when the changes in retail price change increased. By contrast, the unemployment rate raised when the changes in retail price change decreased.In other words, the unemployment rate decreased at first, then increased and decreased again. However, contrary to the changes in unemployment, the changes in retail price change increased at first, then decreased and increased again during the same period. Therefore, the relationship between changes in retail price change and unemployment can be analysed that a stable relationship exists between them and they are inversely related. The graph below shows an inverse relationship between retail price % change and unemployment directly.

(data for this graph adopted from the handout)

Moreover, we can notice unemployment is low when retail price % change is high and unemployment is high when retail price % change is low from the two graphs above.


There are some facts which can be expected from the data and question b. First of all, there is an inverse relationship between inflation rate and unemployment. Therefore, we can expect when inflation rate is low, unemployment is high and, conversely, unemployment is low when inflation rate is high. From this negative association, we are able to expect that unemployment might be changed as a result of changes of inflation rate. It means that there are changes of inflation rate first then the changes of unemployment will happen. Apart from these two facts, the data show the changes regularly repeated. Accordingly, we can expect that inflation can be affected by external factors and governments might be able to influence changes in the rate of inflation and unemployment through choosing their preferred combination of unemployment and inflation.

First of all, the relationship between inflation rate and unemployment can be explained by Philips curve analysis. According to Powell (2005), A. W. Philips argued that the inverse relationship existed between unemployment and the rate of price inflation. This relationship is illustrated by the Philips Curve as shown in the graph below.

(adopted from Powell: p.308)

The Philips Curve above shows a negative association between unemployment rate and inflation rate. When there is high inflation, unemployment is low and when there is low inflation, unemployment is high.

Moreover, Powell (2005) states that the Philips Curve suggests how the conflict between full employment and control of inflation can be dealt with. The reason is that the combinations of inflation and unemployment can be arisen in the short-run as shifts in the aggregate demand curve move the economy along the short-run aggregate supply curve. In the short-run, a rise in aggregate demand for goods and services leads to a greater output of goods and services and a higher price level. In other words, a lower rate of unemployment will be happened by expanding aggregate demand. Therefore, governments and policy makers not only move the economy from point A to point B but also reduce unemployment rate from U1 to U2. However, a higher rate of inflation is also happened (P1?P2). Accordingly, it means there is a trade off between falling unemployment and increasing inflation. Points such as A and B on the Philips Curve offers policy makers a menu of possible outcomes and, consequently, governments might decide an acceptable combination between unemployment and inflation.

According to Mankiw and Taylor (2006), Friedman and Phelps introduced ‘expected inflation’ to help understand the short-run and long-run relationship between inflation and unemployment. Expected inflation measures how much people expect the overall price level to change. The graph below introduces the role of expectations into the inflationary process.

(adopted from Powell: p.311)

In the graph above, we assume unemployment is initially at its natural rate (UN) and price inflation equals wage inflation. When a government pursues an expansionary monetary policy to expand demand, the economy moves along Philips curve SRPC1 (from point A to Point B). At point B, unemployment is below its natural rate, but inflation rises to P1. Consequently, in the short-run, inflation rises above expected inflation and workers may suffer money illusion, the false belief that an increase in money wage is also a real wage increase.

However, a point such as B is unsustainable because people get used to this higher inflation rate and they increase their expectations of inflation. Firms and workers, therefore, consider higher inflation when setting wages and prices in order to restore the real wage. The short-run Philips curve, accordingly, shifts to the right (from SRPC1 to SRPC2). Consequently, the economy ends up at point C where there is higher inflation than at point A, but with the same level of unemployment.

Powell (2005) says that once the economy reaches at point C, any further expansion of aggregate demand moves the economy to point D and inflation rate of P2. The reason is that this situation will continue if there are higher expected rates of future inflation. Therefore, it gives explanations why unemployment rate regularly decreases then increases and why inflation rate is always positive. Furthermore, it also explains why the changes in inflation rate and unemployment are repeated.

Apart from the Philips curve, Keynesian theories of inflation are also helpful to understand the facts which are found. The graph below shows an upward-sloping SRAS curve.

(adopted from Powell: p.279)

According to Powell (2005), Keynesians now believe the SRAS curve slopes upward and upward-sloping SRAS curve shows that an increase in the price level is necessary to persuade companies to supply more output. It, therefore, explains why unemployment is changed as a result of changes in the rate of inflation. A rise in the price level (from P1 to P2) reduces the real wage rate. Therefore, firms can employ more labour and supply more output and, consequently, unemployment will decrease to increase supply.

Moreover, governments can inflate the price level and approach full employment through an increase in aggregate demand. The graph shows an increase in aggregate demand is reflationary or inflationary. It means that expansionary fiscal or monetary policy reflates real output and create jobs, and inflates the price level. Therefore, a rise in aggregate demand moves the economy towards full capacity and, consequently, the economy will be able to approach full employment and full capacity.

However, once the economy reaches at full employment, it means there is no spare capacity. Therefore, any further increase in aggregate demand might cause prices to rise and the eventual creation of excess demand will lead to demand-pull inflation.


Apart from unemployment and the exchange rate, there are more factors influencing changes in the rate of inflation. For example, a monetary and fiscal policy and a prices and incomes policy are available to the governments and policy makers in order to control inflation.

Monetary policy and fiscal policy can influence aggregate demand. When the aggregate demand curve or the aggregate supply curve shifts, there are fluctuations in the economy’s overall output of goods and services and its overall level of prices is also changed. Therefore, a change of these policies can lead to short-run fluctuations in output and prices.

A government and policy makers can change interest rates to adjust to balance the supply and demand for money. Furthermore, targeting a certain level of the money supply can be also treated as monetary policy. Therefore, setting interest rates and money supply will be different between in the case of demand-pull inflation and in the case of cost-push inflation. For instance, deflationary monetary policy such as raising interest rates and reducing banking lending might be introduced when demand-pull inflation occurs. However, against cost-push inflation, an expansionary monetary policy such as lowering interest rates might be adopted instead of a restrictionary monetary policy. The rationale behind this is that firms’ costs can be decreased through an expansionary monetary policy.

Consequently, monetary policy can be described either in terms of the money supply or in terms of the interest rate. If monetary policy aims to expand aggregate demand, increasing the money supply or lowering the interest rate is adopted. However, changes in monetary policy that aim to contract aggregate demand can be described either as reducing the money supply or as raising the interest rate.

The government is able to affect inflation not only with monetary policy but also with fiscal policy. Mankiw and Taylor (2006: p.721) tells us, “Fiscal policy refers to the government’s choices regarding the overall level of government purchases or taxes”. Through the change of the level of the taxes, a government can indirectly shift the aggregate demand curve by influencing the spending decisions of firms and households. However, contrary to this, the aggregate demand curve can be moved directly when a government changes its own purchases of goods and services. Therefore, fiscal policy might be different in accordance with various causes and different levels of economic activity.

Against demand-pull inflation, a government is able to adopt deflationary fiscal policy involving increasing taxation and/or reducing government expenditure. Fiscal policy will indirectly reduce aggregate demand. For example, consumers might lower their spending and firms might reduce investment if a government raises income and corporation tax. By contrast, government expenditure can directly influence aggregate demand. Therefore, deflationary fiscal policy will have a downward multiplier effect and might be able to remove an inflationary gap. The graph below shows that reduced government spending (from G to G1) removes the inflationary gap of AB.

(adopted from Grant: p.573)

Contrary to the case of demand-pull inflation, different fiscal policy will be also employed to combat cost-push inflation. According to Grant (2000), reducing corporation tax, decreasing indirect tax and cutting income tax are a fiscal approach to cope with cost-push inflation. Through those policies, a government can reduce firms’ costs or lower wage claims and then will influence aggregate demand.

Moreover, monetary inflation will be expected, a government can adopt lowering expenditure by more than tax revenue as its fiscal policy.

The discussion of fiscal policy has stressed how changes in government expenditure and changes in taxes influence the quality of goods and services demanded. Fiscal policy works primarily through aggregate demand in the short-run. However, in the long-run, it is also able to affect the quantity of goods and services supplied.

Apart from monetary policy and fiscal policy, incomes policies and price controls can also influence changes in inflation.

The incomes policy introduced to reduce inflation. Grant (2000) states it is to connect the growth of incomes to the growth of productivity in order to prevent the excessive rises in factor incomes. The incomes policy largely concentrates on wages even though there are many different forms of income such as wages, interest and profits. The rationale behind this is that wages form about two thirds of total costs.

Governments are therefore able to control inflation by setting a percentage limit or a flat rate limit. Setting a percentage limit of wages will be useful to maintain wage differentials. Therefore, people in the high-income brackets might be beneficial as a result of a percentage limit. However, the lower brackets of income might be favourable to a flat rate limit because it reduces differentials. Consequently, the incomes policy will be helpful to maintain a wage and price still in the short-run. However, if exceptions are allowed too much or trade unions are strongly opposing the policy, it will be difficult to manage the pace of inflation.

Price controls is also employed to restrict price increases. However, contrary to the incomes policy, price controls deals with the symptom of inflation rather than causes. For example, governments limit prices of products to control inflation rate if there is high inflation. Therefore, when inflation will be expected or is already happened governments and policy makers are able to choose price controls to restrict price increases and restore its symptom directly. However, if price controls continues, there will be some problems e.g. distorting the allocation of resources. The reason is that price controls can lead to shortages and create a demand for s system of rationing.

In conclusion, governments might try to restrict price increases and to limit pay settlements in order to reduce inflationary pressure. However, introducing the incomes policy and price controls has not only the effectiveness but also problems. Although they are separate policy, those policies can be used together. Furthermore, they might have an effect on the problem of cost-push inflation if they are employed together. Therefore, the incomes policy and price controls will be more effective when those policies are employed together. However, they might be inefficient in the long-run. The reason is that incomes policy and price controls can distort the market economy e.g. creating labour shortages.


  • Grant, S.J., 2000, STANLAKE’S INTRODUCTORY ECONOMICS, Essex, Longman
  • Mankiw, N.G. and Taylor, M.P., 2006, Economics, London, Thomson Learning
  • Marcouse, I., Wall, N., Lines, D. and Martin, B., 2003, Complete A-Z Economics & Business Studies, London, Hodder Arnold
  • Powell, R., 2005, AQA advanced Economics, Oxfordshire, Philip Allan Updates

    Sungsoo Noh

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Effects Of FDI On Economic Growth Of Nigeria


There are various measures of economic development in which the rate of growth of an economy is one. The economic growth of a country has been acknowledged to be affected by the amount of both foreign and domestic investment available for its socio-economic use. Such foreign investment could either be foreign direct investment (FDI) or foreign portfolio investment (FPI).

Foreign Direct Investment can be defined as investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of the investor, for the purpose of having effective voice in the management of the enterprise. The parent enterprise through its FDI effort seeks to exercise substantial control (ownership of greater than or equal to 10% of ordinary shares or access to voting rights in an incorporated firm) over the foreign affiliate company. Ownership share amounting to less than 10% is termed as portfolio investment.

The parent enterprise are referred to as Multinational Enterprises (MNEs) or Transnational Corporations (TNCs) and they are defined as firms that own in some way, or controls value – added activities in two or more countries (Dunning and Lundan, 2008). It can also be defined as an enterprise that controls and manages production establishments plants located in at least two countries which is simply one subspecies of multi- plant firm (Caves 1996).

The FDI go along with technology transfer and capital inflow. While FDI may be said to have an adverse impact on some countries in terms of capital flight, it can be theoretically argued that there are favourable impacts on the host country receiving FDI in terms of increased growth and development due to increase in technology and infrastructure.

Some studies on the effects of FDI on economic growth have shown various results depending on the country of study and other determinants of FDI. Studies on Nigeria however does not show a common agreement on the influence of FDI on economic growth, therefore FDI would be looked at to determine if it has a positive or negative impact on the economic growth of Nigeria. There is no vast literature on the impact of FDI on the oil sector vis-à-vis economic growth, hence, the need to determine the effect of oil sector FDI on the economic growth of Nigeria is appropriate.

There is in general, a positive relationship between flows of FDI and growth in world GDP, and as a share of world GDP, the importance of the FDI stock has increased significantly over the past two decades (Dunning and Lundan, 2008).

Objectives of the study

The broad objective of this study is to examine the relationship between FDI inflows and economic growth in Nigeria.

The specific objectives are to:

1) Investigate the empirical relationship between FDI and GDP growth in Nigeria.

2) Examine the effects of oil sector FDI on economic growth in Nigeria

3) Show the percentage of FDI accounted for by the oil sector on the economic growth of Nigeria.

Justification of the study

Although many studies have been carried out on FDI and economic growth, its percentage on GDP is still very low. The reason for its low contribution to GDP may be linked to government policies and political instability and this explains why it is still a common topic for lectures, discussions as well as issue of primary concern to the general public.

Scope of the study

The research work would be limited to the aggregate study of the time series data covering real GDP per capita growth, exports as a percentage of GDP, FDI as a percentage of GDP, exchange rate and gross domestic capital formation in the Nigerian economy from the period 1970 to 2008.

Organisation of study

Following this introductory chapter is the section on background of the study which gives a brief background of FDI on the Sub – Saharan Africa, West Africa and the Nigerian Economy. The literature review is the next chapter which shows both the theoretical and empirical review of literatures on FDI and economic growth. Chapter three which is the research methodology contains the theoretical/analytical framework, the model to be used as well as estimation techniques and sources of data. Followed by this is the empirical analysis which features the presentation and discussion of results. The study is rounded up in chapter five with summary of findings, policy recommendations, conclusion, and limitation of study with suggestions for further research.

General Background

The Nigerian economy was dominated by agriculture and manufacturing sector until the late 1960s after the discovery of crude oil. Since then, there has been a shift from agriculture to the oil sector. The decline of the manufacturing sector following an energy discovery has been termed the “Dutch disease” and has been investigated in many recent studies (Bruno and Sachs, 1982).

Due to the discovery of oil, there has been a surge of foreign investors in the country. Transnational Corporations such as Total (France), British Petroleum (United Kingdom) and ChevronTexaco (America) invest in projects to develop undersea oil fields off the coast of Nigeria.

Nigeria is richly endowed with natural resources mainly oil and gas, mineral deposits, and vegetation (Dinda, 2009). Nigeria remains one of the largest recipients of FDI in Sub – Saharan Africa.

According to United Nations Conference on Trade and Development (UNCTAD) World Investment Report, 2006, Nigeria received 11% of Africa’s total inflow of FDI in 2006 and 70% of West Africa’s total inflow of FDI. Oil however accounted for 80% of the total inflow of FDI into Nigeria.

Nigeria dominated the increase of FDI inflows into West Africa in 2005 to $4.5billion from $3.2billion in 2004, a 40% increase which represented 15% of Africa’s total value (UNCTAD, 2006).

Nigeria was one of the top 10 recipients of high petroleum share in FDI inflows with the 80% inflow of FDI into the oil and gas industry in 2006 (UNCTAD, 2006). The oil sector is the largest receiving FDI (World Investment Report, 2006)

By and large, global FDI increased in the 1980s and ever since then, FDI has remained the largest component of net resources flows to developing countries compared to other capital flows.

Africa had a rise of 78% in FDI inflows from 2004 to 2005 (UNCTAD World Investment Report, 2006). This has actually led some countries to either promote or reduce the extent of FDI by introducing policies to regulate FDI.

Recently, some countries in Sub – Saharan Africa have introduced policy measures to promote investment, for example Gambia lowered corporate taxes while some tightened regulatory framework like Nigeria, by adding local content requirement. Other African countries such as Morocco lowered corporate taxes and Algeria introduced new foreign ownership limitations in specific sectors (UNCTAD, 2010).

Chapter 2 – Literature Review

There has been a lot of research on the relationship between FDI and economic growth although most of these researches were not on Sub – Saharan Africa.

Some studies on the effects of FDI on economic growth have shown various results depending on the country of study and other determinants of FDI. Both positive and negative effects have been reported for FDI and economic growth in several countries in previous literatures.

In theory, it is expected that FDI would increase the growth of an economy due to increased technology transfer and capital inflow (Dunning and Lundan, 2008).

However, research carried out on this has showed otherwise that there is no common agreement in the linkage between FDI and economic growth.

Blomstrom et al. (1994) reported that FDI exerts a positive effect on economic growth but this is dependent on the level of income. Borensztein, De Gregorio and Lee, (1998) stated that ‘FDI contributes to economic growth only when a sufficient absorptive capability of the advanced technologies is available in the economy’.

Obamwa (2001) in his study of FDI in Uganda found that FDI affects growth positively but insignificantly. He stated that macroeconomic and political instability and policy consistency are important parameters determining the flow of FDI into Uganda.

It was noted by Akinlo, (2004) that exports have a positive and statistically significant effect on growth and noted further that extractive FDI might not be growth enhancing as much as manufacturing FDI. He found that foreign capital has a small and not statistically significant effect on economic growth in Nigeria.

According to Johnson, (2006) he finds in his empirical analysis that FDI inflows enhance economic growth in developing economies but not in developed economies.

In the exploration of FDI on economic growth in Nigeria, Adelegan, (2000) found that FDI is negatively related to gross domestic investment; and Carkovic and Levine, (2002) stated that the predictions of the effects of economic growth on FDI are ambiguous as some models suggest that FDI will promote growth only under certain policy conditions.

The natural resources of a country attracts FDI into that country (Asiedu, 2003) and in the case of Nigeria, it is the Petroleum industry that receives the greatest portion of the FDI inflow (UNCTAD, 2006).

The studies on FDI and Economic Growth in Sub – Saharan Africa, and Nigeria in particular showed that the oil industry accounted for 80% of the total FDI on per capita GDP in 2005 (UNCTAD, 2006).

From the above, the attraction of FDI inflow into the Nigerian Economy is mostly natural resource based, in which the oil sector is the greatest receiving FDI into the country.

There is no vast literature on the impact of FDI on the oil sector vis-à-vis economic growth, hence, the need to determine the effect of oil sector FDI on the economic growth of Nigeria is appropriate.

Chapter 3 – Research Methodology

The evidence for the impact of FDI on economic growth is far from conclusive, but basically, FDI is expected to increase economic growth through increase in the production of capital.

Since the primary objective of this study is to investigate the empirical relationship between FDI and economic growth in Nigeria using real GDP to measure growth, the analysis would be done using the Ordinary Least Square (OLS) regression analysis on the time series data from the period 1970 to 2008.

Analytical Framework

The methodology involves estimating an econometric model as well as simple calculations such as average and percentage. The model to investigate the impact of FDI on growth, we use a simple Cobb-Douglas production function.

Y = A Kα Lβ ——————— (1)

Where Y is output; Gross Domestic Product (GDP), L is labour and K is capital stock. The variable A captures the total factor productivity of growth in output not accounted for by the growth in factor inputs (K and L). Capital stock is assumed to consist of two components: domestic and foreign owned capital stock.

Kt = Kdt + Kft

The two components of capital stock is substituted for Kα in equation 1 and the augmented Solow production function is adopted that makes output a function of stocks of both domestic and foreign owned capital, labour, human capital and productivity (Mankiw et al 1992).

Yt = At + Kαdt + Kλft + Lβ+ Hγ ——————– (2)

Taking logs and differentiating equation 2 with respect to time, we obtain the growth equation:

yit = ait + αkdit + λkfit + βlit + γhit ——————– (3)

where lower case letters represent the growth rates of output, domestic capital stock, foreign capital stock, labour and human skill capital stock, and α, λ, β, γ represent the elasticity of output, domestic capital stock, foreign capital stock, labour and human skill capital respectively.

Equation 3 is a fundamental growth accounting equation, which decomposes the growth rate of output into growth rate of total factor productivity plus a weighted sum of the growth rates of capital stocks, human capital stock and the growth rate of labour. Theoretically, α, β, γ, are expected to be positive while the sign of λ would depend on the relative strength of competition and linkage effects and other externalities that FDI generates in the development process.

Following the established practice in the literature, according to (Ayanwale, 2007) Kd and Kf are proxied by domestic investment to GDP ratio (Id) and FDI to GDP ratio (If), respectively in view of problems associated with measurement of capital stock. The use of rate of investment is hinged on the assumption of a steady state situation or a linearization around a steady state. The effect of trade liberalization on economic growth is operating through Total Export and Import to GDP (TP).

The final form of Equation 3 therefore is:

yit = ai + αIdit + λIfit + γhit + εit ——————– (4)

where εit is an error term.

Equation 4 therefore is the basis for the empirical model estimation in the next section.

Model Specification and analytical framework

Following the above, the empirical model of Ayanwale, 2007 is adapted with some variations.

The Dependent variable is Gross Domestic Product (GDP) per capita (in log form). This is the ratio of real GDP to the population.

The independent variables included in the model are:

* Lag of Gross Domestic Product

* Foreign direct investment (FDI) in Nigeria (in percentage form) that is (FDI/GDP*100)

* Domestic investment (in log form) –

* Openness of the host economy to trade. The ratio of trade (total exports plus imports) to

GDP (in log form)

* Human capital – Importance of education to economic growth is proxied by the ratio of

secondary and tertiary institution enrolment in the population.

* Exchange rates – the real effective exchange rate (REER) is used.

* Oil production – the oil production in barrels is used here.

The above suggests that a general empirical model of FDI on Nigeria’s economic growth can be expressed as:

GDP = f(LagGDP, FDI, DI, XM, HC, EXR, OP) ——————— (5)

Where GDP = Gross Domestic Product per capita

LagGDP = lag of Gross Domestic Product

FDI = Foreign Direct Investment

DI = Domestic Investment

XM = Exports plus imports

HC = Human Capital

EXR = Exchange rate

OP = Oil production

The equation for the above expression is shown as:

LGDP = α + LGDPt-1 + β1LFDI + β2LDI + β3ΔXM + β4ΔHC + β5ΔEXR + β6OP + εi ——- (6)

+/- + + +/- – +

Where LGDP, LFDI, LDI are logs of all the variables defined above

α = constant

β1, β2, β3, β4, β5, β6, are coefficients

Δ = difference; and

εi = stochastic disturbance / error term

The a priori expectations of the GDP and the other variables are shown with signs below the variables in equation 6 above.

It is expected that GDP and FDI move in the same direction. In other words, an increase in the level of FDI into the host country would apriori lead to an increase in the real GDP. As FDI increases, GDP will tend to reduce relative to it thereby making the relationship ambiguous.

The descriptive method of data analysis is used with simple statistical tools such as graphs and charts in analysing the percentage FDI contributes to GDP. The OLS estimation technique is used to determine the relationship between FDI and economic growth in Nigeria over the past 39years.

The source of data used in this study is basically secondary data and they are sourced from the Central Bank of Nigeria (CBN) Statistical Bulletin, CBN Annual Report and Statement of Account, World Development Indicators, 2010 and paper presentation by experts.

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Impact Of The Financial Crisis On The Singapore Economics Essay


The financial crisis was due to the bankruptcy of banks and extreme market volatility. One of the factors leading to the financial crisis was the growth of the housing bubble which happened in 2005 to 2006. Real house prices surged greatly, making residential real estate great and very safe investment. This housing bubble resulted in numerous homeowners refinancing their homes at lower interest rates. Therefore, it was very easy to borrow money, especially for purchasing a home. This caused the high default rates on “subprime” and adjustable rate mortgages (ARM) to increase quickly.

Cheap and easy credit terms (low interest rates) and a long-term trend of rising housing prices encourage borrowing since the Federal Reserve slashed the interest rates to cope with recession and September 11 terrorist attacks. This affects consumption and investment to increase as people and firms will borrow more.

Loans such as mortgages and credit cards were easy to obtain and consumers feel that they have the ability to repay within the stated credit period. Banks repackage the mortgages as mortgage-backed securities (MBS) and collateralized debt obligations (CDO) and these financial instruments greatly increased as borrowers want higher returns.

There is also a lack of transparency and understanding by the investors. Thus, the risk in investing regular mortgage backed securities was considered low and it was sold to institutions and investors all around the world. In addition, investors invested more than they actually had capital for as they considered such securities low risk. This in turn contributed to the deflating of the housing bubble as asset prices move inversely to interest rates and it is risky to speculate in housing. USA housing and financial assets decreased in value after the housing bubble burst. Even so, many banks and firms still continued bundling the mortgages despite many of them had bad loans, and Wall Street kept buying and selling them to investors. Agencies that regulate the U.S. financial sector were also not paying attention.

Besides easy credit conditions, both government and competitive pressures led to an increase in the amount of subprime lending. Major U.S. investment banks and government sponsored enterprises like Fannie Mae contributed in the expansion of higher-risk lending. Some banks and institutions were willing to lend money to homebuyers with poor credit.

U.S. Securities and Exchange Commission (SEC) relaxes the net capital rule and this encouraged the largest five investment banks to increase their financial leverage and aggressively expand their issuance of mortgage-backed securities. Fannie Mae and Freddie Mac further expanded their riskier lending.

The subprime lending increased United States’ homeownership rate significantly. Thus, rents decrease and house prices increase. The increase in housing prices stopped in 2006 and many subprime borrowers faced difficulties paying their mortgage and some was on the verge of bankruptcy. The losses in the subprime mortgage markets triggered uproar throughout the international financial system in mid 2007.

Confidence in many financial institutions and stock market were also affected. When stockholders found out about the bad loans these firms were carrying, they withdraw their money immediately. The markets plummeted. Besides that, there was a lack in trust in banks and interbank lending was disrupted. Defaults and losses on other loan types also increased significantly as the crisis expanded to other parts of the economy.

Demise of Bear Stearns happened in March. In July, IndyMac Bank went into receivership, but the worse of all was the bankruptcy of Lehman Brothers in September 2008. In conclusion, all this happened due to greed, lack of regulation and creative innovation in the financial industry.

b) Assess the impact of the US financial crisis on the Singapore economy. (20 marks)

Singapore was the first East Asian country to suffer a recession from the US financial crisis after July 2008. As Singapore is a small nation, we have to rely heavily on exports and almost 66 percent of its domestic production is exported. Singapore’s economy will hence be affected since its export partners are affected by economic crisis.

The recession arises due to the reduction of non-oil exports in manufactured goods caused by the deterioration of economic conditions in the US and Europe. The slowdown is caused by the weak global demand for high technology equipments, an industry on which Singapore is heavily reliant. As a result, Singapore exports decline drastically. In the first quarter of 2009, trade fell by a sharp 24 per cent. Fluctuations in Singapore’s real GDP are closely related to changes in trade figures because Singapore is an open economy. Hence, with the decrease in trade, Singapore real GDP declines.

Labour productivity in the economy has also been declining due to recession. Cyclical unemployment rate increases due to recession as workers are unable to secure similar paying jobs. Companies are encouraged to make cut wages instead of retrenchment. Consumption will decrease as people have less income due to pay cut or retrenchment.

The industries that were adversely affected by job losses are manufacturing, transport, tourism and wholesale trade since these sectors are most exposed to the external economic environment. The manufacturing industry, which accounts for a quarter of the economy, contracted 11.5 percent in 2009 last quarter, compared with a revised 4.9 percent drop in the previous three months, mainly due to the persistent weakness in global demand for electronics, chemicals and biomedical products.

Due to this financial crisis, Monetary Authority of Singapore (MAS) eases its monetary policy to combat slowing growth. In order to boost export, MAS shifted Singapore dollar to a neutral stance, making it cheaper in relation to other major currencies and making domestic exports competitive. The Singapore currency has declined 8.1 percent against the U.S. dollar in that period. However, this also implies that import of necessities will be more expensive which will affect the purchasing power of people, i.e. people will spend less. There will be lesser business for companies and they will be struggling to stay afloat.

Inflation in 2008 was 6.5%, higher than expected owing to rising oil and commodity prices. Hence, we can see supermarkets like NTUC selling many household brands to help the poor/middle aged families to survive this financial crisis. Due to expectations that inflation will get worse, consumers will curb their spending and consumption decrease as a result.

The exposure of Singapore’s banks to sub-prime mortgage is limited. Economic conditions in Singapore have been affected by the massive loss in wealth from the collapse of the stock market. This in turn reduces consumption and investment in assets. Businesses might not have the operating capital and some businesses cannot meet their operating expenses.

The government plays an important role to combat recession. They tapped its reserves to tackle this crisis and implemented ways to boost infrastructure spending and public aid in its Budget.

2) The Singapore government’s year-long scheme to help companies avoid retrenchments and keep unemployment numbers down has been extended for another six months till June 2010.

Explain the likely causes of unemployment in Singapore.

The causes of unemployment in Singapore can be described under 3 categories namely, frictional unemployment, structural unemployment and cyclical unemployment.

Frictional unemployment is short term unemployment associated with the process of matching workers with jobs. This is commonly seen in Singapore as people will always spend time to look for better jobs e.g. higher pay, higher satisfaction based on their competency. One example will be university graduates who may need more time to search for jobs at an acceptable salary.

Structural unemployment is long term and chronic unemployment which happens due to regular and predictable changes in labour demand. Due to the revolving world, everything is changing which might lead to a decrease in demand for certain goods/services. Hence, structural unemployment may arise due to rapid changes in technology. Besides that, it could also be due to lack of relevant skills which are in demand by the employers, language barriers, discrimination on the basis of age, ethnicity and race and long-term mismatch as employees need time to learn new skills. Major shifts of consumption taste and a variety of other factors can reduce the demand for certain skills and increase that of others, thus making structural unemployment occur.

Structural unemployment also exists where there is a mismatch between the skills of the workforce and the requirements of job opportunities or the workers live too far from the demanding area. For example, many unemployed workers from manufacturing industry found it difficult to find new jobs without re-training.

Cyclical unemployment depends on the business cycle. It will arise when there is a recession (lowest peak of the business cycle) as the business cycle is low and many firms will reduce the demand for inputs, including labor in recessional periods when production declines. On the other hand, cyclical unemployment will decrease when there is economic growth (highest peak of the business cycle) because total economic output is being maximized.

Describe the various policies implemented by the Singapore government to solve the problem of increasing unemployment.

PM New Year message 2010 mentioned that the government will continue to focus on preserving jobs, and helping workers who are unemployed to find new jobs. In December 2008, the tripartite partners launched the Skills Programme for Upgrading and Resilience (SPUR). SPUR was included in the Resilience Package in an early Budget 2009.

SPUR offers training programmes to help workers upgrade their skills or acquire new skills for seeking re-employment. Through SPUR, workers have an opportunity to gain a competitive edge in the job market while employers are able to manage manpower, save manpower costs and retain workers by involving them in skills upgrading and development. This allows workers to stay employed, save jobs and strengthen their individual abilities during the recent economic downturn.

Furthermore, the government also introduces a Jobs Credit scheme to help employers to retain their workers. This enables businesses to save jobs as much as possible, without the need to retrench workers. The Jobs Credit provides every employer with a cash grant to reduce their costs of employing Singaporean workers during the crisis. Hence, more Singaporeans will be employed.

Workers have to make necessary changes in this economic downturn such as getting lower wages etc to remain competitive and save jobs. Businesses also have to find ways to cut unnecessary costs in their operations to save jobs.

Furthermore, there is also a skill development fund (SDF) to subsidise training fees and its main objective is to give financial assistance to employers in order to encourage them to train/upgrade the skills of their workers.

Continuing Education and Training (CET) Masterplan is another plan to prepare Singaporean workers for the future and develop a source of competitive advantage for Singapore. Workers can get help and advices on jobs and training that are suitable for them. Government is investing in this plan so that about 60% of residents can have a diploma qualification by 2010 and this helps to equip Singaporeans with the necessary skills when they are preparing to switch careers. It also forms a lifelong learning system to help workers find their potentials and seize new opportunities.

Moreover, the government increased the mandatory retirement age to 62 to help workers stay employed longer.

Evaluate the effectiveness of the Jobs Credit Scheme in reducing unemployment.

Jobs Credit Scheme is implemented to encourage businesses to sustain jobs for Singaporeans in the economic downturn. This will provide every employer with a 12% cash grant (on the first $2,500 of monthly wages of each local employee on their CPF payroll) to reduce their costs of employing Singaporean workers during the crisis. Hence, it is encouraged that employers would hire Singaporean labour instead of hiring foreign labor (as they are cheaper) so as to enhance the competitiveness of Singaporean labour in the job market. This can help to reduce the unemployment rate for Singaporeans.

However, a drawback of this scheme is that unprofitable companies would rather retrench workers than receive cash grant from the government. Hence, companies which will benefit from this scheme are usually big and stable companies which are able to survive through the recession. This is compared to smaller companies because they have to resort to measures such as retrenchments or cutting down costs in order to stay afloat. As such, higher unemployment and more job losses will still be inevitable.

This scheme will also imply that companies would be more willing to hire local graduates. In contrast, foreigners need not contribute to CPF, unless they become Permanent Residents (PR) or Citizens. Without employee’s contribution, there would be no employer’s contribution and thus, hiring a foreigner is cheaper and many companies will still hire foreigners despite the benefits of the Job Credit Scheme.

This scheme may also stop and employer would no longer receive cash grants for his contribution to the local graduate’s CPF account. As a result, employers would prefer to hire foreign graduates than local graduates due to the fact that it would be cheaper in the long run. Hence, the main issue is how long this job credit will run. It is impractical that it lasts for only a short term within this economic crisis because employability should be considered on a long-term scale.

3. Explain and evaluate the effectiveness of the other various fiscal policies which the government implemented in 2009 to deal with the economic crisis. (20 marks)

The government has implemented the Resilience Package of $20.5 billion, to cope with an economic downturn. It includes measures to prevent loss of jobs, enhance business cash flow and provide support for Singaporeans as well as investments in infrastructure for the long term.

The Resilience Package consists of five components:

Jobs for Singaporeans. $5.1 billion would be spent to help preserve jobs through Job Credits Scheme and related programmes like SPUR. This allows businesses to cope with cash flow. The Government will give low-income workers a temporary workfare income supplement (WIS) Special Payment to supplement their pay and encourage them to stay employed. The government will also create more jobs.

Stimulating bank lending. The Government will launch the Special Risk-Sharing Initiative (SRI) to enable companies to have access to credit to continue their operations and preserve jobs. The Government will also enhance existing loan schemes e.g. local enterprise finance scheme and they have dipped into reserves to fund both SRI and Jobs Credits.

Enhancing business cash-flow and competitiveness. Various tax measures and grants costing $2.6 billion would be implemented to help businesses with cash-flow and enhance competitiveness. Taxes work as an automatic stabiliser and this is evident in years of low GDP growth where, taxes would be reduced to encourage investments.

Supporting families. $2.6 billion would be used to support Singaporean households especially lower-income households. The government will provide assistance to households i.e. increasing goods and services tax (GST) credits and senior citizens’ bonus, focus more on the most vulnerable groups by providing financial assistance schemes for education and provide support for charitable organisations and the community i.e. increasing citizens’ consultative committees (CCCs) ComCare fund and self-help groups (SHGs).

Building a home for the future. The Government will commit $4.4 billion to infrastructure development as it is an important feature of Singapore’s fiscal strategy. Hence, the government will bring forward infrastructure projects and spend on accelerating public sector infrastructure, developing our neighbourhoods and spending more on education and health infrastructure (due to aging population).

I will say that the Resilience Package is effective because it has helped to reduce the unemployment rate in Singapore during an economic crisis. One example is NTUC which had work closely with employers to save jobs, instead of retrenchment to save costs. They have also sent workers for SPUR training and skills upgrading.

Furthermore, this is evident that the Resilience Package helped Singaporeans from the economic crisis. Despite sharp declines in our GDP, foreign worker numbers fell 21,000, but local employment actually went up by 7,000 in the first half of 2009 which shows that Jobs Credit Scheme is effective.

However, the Resilience Package is ineffective as it contains temporary measures such as the Jobs Credit for all businesses and Special Risk-Sharing Initiative which not be built into ongoing government programmes.

Our government uses the discretionary fiscal policy (running a larger deficit in a year of low growth) which provides tax rebates to reduce tax collections, and spend more on goods and services, grants or tax credits to increase incomes.

The effectiveness of discretionary fiscal policy is enhanced by the short implementation lags in Singapore due to our efficient tax and CPF systems that enable the Government to distribute transfers quickly. Fiscal policy in Singapore is financed from accumulated budget surpluses i.e. past reserves rather than from borrowing. This enhances the impact of temporary measures.

However, discretionary fiscal policy has its limitations. Singapore is an open country. Hence, using it as a tool for macroeconomic stabilisation is more limited due to leakages of imports. Fiscal transfers on aggregate demand would not be effective because a portion of injections into households/businesses are kept as savings.

On fiscal policy, reserves built up during the past years of strong economic growth reduce government charges and boost spending. Multiplier of discretionary fiscal measures is insignificant. Targeted transfers at the lower income such as GST Credits tend to have a higher multiplier. However, taxes and investments tend to have a lower multiplier which provide a longer term period to economic growth.

It is clear that the Singapore economy cannot be left to recover on its own unless changes in policy are made. The government has already taken some measures to reduce costs and taxes over the last few months. These were steps in the right direction, but they were not the complete solutions to the problem. These changes should be implemented with the longer term developmental needs of the economy.

4. Some economists have warned about the possibility of a “double-dip recession,” with economic contraction following the current recovery. In your opinion, what is the likelihood of this happening?

Give your reasons. (10 marks)

I feel that Singapore is unlikely to sink back into recession as our financial sector is recovering, with assets of the 20 largest fund managers in Singapore growing 23 per cent in the first half of 2009.

A reason why Singapore is unlikely to sink back into recession is because of the global competiveness. The world is cooperating on several projects which include Asia-Pacific Economic Cooperation (APEC) and G20.

APEC is a forum which facilitates economic growth, cooperation, trade and investment in the Asia-Pacific region. APEC creates efficient domestic economies and increasing exports. Free and open trade and investment enables economies to grow, creates jobs and provides new opportunities for international trade and investment. Singapore will work with like-minded economies and international financial institutions like the IMF, World Bank and Asian Development Bank to advance free trade. G20 is an UN climate change conference where countries will come together to solve the problem of climate change and work towards an ambitious outcome in Copenhagen.

From here, we can see that protectionism, which could affect global trade and growth, has been closely monitored. Singapore is working towards closer regional economic integration and pursuing different free-trade initiatives to expand our economic network. We are restructuring our economy so that it remains nimble and competitive.

The government has taken a few measures to revive demand in the system through stimulus package. They guarantee that businesses will have sufficient funds for their daily operations. Given our strong economic fundamentals, the government is able to take rational measures. Furthermore, the savings we have put away (by building reserves) during good times, Singaporeans tackling challenges together and social cohesion will bring us through this economic downturn.


Macroeconomic Unemployment Explained

Job Credits – A Good Sign For Soon-to-be Grads?

Riding the global economic crisis in Singapore

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CSC71001 Programming I Assessment 2 Paper


Programming I
Assessment 2
Title: Practical Skills
Weighting: 15% of unit grading
Due: Monday Week 7 (16th December 2019 at 11PM)
Your task is to create a game in Greenfoot, with three types of elements: a PLAYER object, controlled by the player; FOOD objects that can be ‘caught’ by the player; and ENEMY objects, that can ‘catch’ the player. If the enemy catches the player, then the game is over.
You must create a new scenario and you must choose a theme for your game that is not crabs/worms and lobsters. All your elements should suit your theme, including the background and the actors. The movement of the actors should ‘make sense’ as per the theme of your game. We do not expect to see the same theme or game created by any two students – be original!
· You will create a Player class.
· At the beginning of the game, there must be one PLAYER object on the screen.
· The PLAYER must be controlled by the keyboard, and at minimum must move automatically and have left and right turn. For example, when the left arrow key on the keyboard is pressed, the PLAYER will turn to the left while moving forwards. When the right arrow key is pressed, the PLAYER will turn to the right while moving forward.
· You will create one Food class.
· There must be eight FOOD objects on the screen at the beginning of the game.
· Each FOOD object must have random movement on the screen – that is, it must turn in random directions and move at a random speed. The food must be able to be caught by the PLAYER.
· When the FOOD is caught by the PLAYER, it should be removed from the screen.
· Later in the Portfolio, you will use the Food class to create different types of Food objects so you will need to think about the theme for your food carefully.

· You will create an Enemy class.
· There must be at least one ENEMY object on screen at the beginning of the game.
· Each ENEMY must at minimum, move at a constant speed and turn in random directions and should be different than the food (cannot use the exact same code).
· If the ENEMY catches the player, the game should end. Sound:
· You should include sound effects that fit the theme of your game. These can be either in¬built or created by you. At least one sound should be created/recorded by you in Greenfoot.
· You should include sound for when the PLAYER is caught by the ENEMY.
· You should include sound for when the PLAYER catches or eats a FOOD.
· You should include sound for when the PLAYER wins the game.
Additional Details:
You can choose to use the inbuilt media for backgrounds and actors OR you can choose to add your own (see Module 4 for how to do this), or some combination of the two. If you do add your own, make sure you use PNGs with transparency for your actors, and keep your file size small.
General criteria: playability, accuracy, careful coding, maintainability of the code, commenting, choice of names for classes, methods (and variables if necessary).
Enhancements for extra credit:
You may like to add the following features, for extra credit:
· Use alternate keys to move the player “up”, “down”, “left” and “right”.
· Add animation when the PLAYER is moving.
· Add animation when the FOOD is moving.
· Add animation when the ENEMY is moving.
· Use your own images or images sourced from the internet. These must be referenced in your documentation and commented in your code.
· Use your own sounds or sounds sourced from the internet. These must be referenced in your documentation and commented in your code.
· Add a score which displays how many FOOD pieces they have caught.

You must export your game as both:
· a JAR file (application); and
· a Greenfoot archive (gfar) file. Please name your file appropriately (see below):
e.g. yourSCUusername_Ass2.jar and yourSCUusername _Ass2.gfar and yourUsername_Enhancements.doc
If you do not submit in the above format, your assignment will not be marked. Submit both of these to MySCU site under the “Assignment 2” link. Make sure you Submit (not just Save) by the due date. Your tutor will contact you if they have any questions about your submission.
Getting Help
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This assignment, which is to be completed individually, is your chance to gain an understanding of the fundamental concepts of object-oriented programming and coding syntax on which later
learning will be based. It is important that you master these concepts yourself.
Since you are mastering fundamental skills, you are permitted to work from the examples in the study guide or textbook, but you must acknowledge assistance from other textbooks or classmates. In particular, you must not use online material or help from others, as this would prevent you from mastering these concepts.

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Research Proposal for Investment and International Business


Foreign Direct Investment or as generally known as FDI is defined by many authors and institutions. As defined by (UNCTAD, 1993), “FDI refers to an investment made to acquire lasting interest in enterprises operating outside of the economy of the investor”, one of the most renowned and usually followed definition of FDI is that of IMF. (IMF, 2003) defines FDI as “A category of international investment that reflects the objective of the resident in one economy (known as direct investor) obtaining a lasting interest in an enterprise resident in another economy (known as the direct investment) where the investment is treated as direct investment when the direct investor has obtained 10 percent or more of the ordinary shares of that entity.

Understanding the importance of FDI in the global trade environment is very essential. The global FDI rose to $916 billion in 2005 an absolute 29 percent increase as compared to 2004 (World Investment Report, 2006). The top contributing TNC’s in the global FDI flows were General Electric, Vodafone and Ford motors as they had about $877 billion of foreign assets which was approximately 19% of the total foreign assets held by the top hundred TNC’s. In the developing world, Hutchison Whampoa (Hong Kong, China) kept the leading position with its foreign assets of $68 billion which accounted to around 17% of the total foreign assets held by the top 100 TNC’s from the developing world.

The existing literature shows that the FDI trends have significantly changed in the past few years and that this significant change is also having an impact on the developing and emerging markets from the developing countries.

Choice of Topic:

This project proposes to analyze the performance of India- an emerging economy in the post liberalisation period and by finding and scrutinizing the key sectors and determinants for Foreign Direct Investment (FDI) in the Indian market.

Proposed Title:

“FDI and Economic growth- India ‘1991-2008′ ”.

Aim of the Research:

During the past few years, there has been a significant transformation in the policies and approaches towards Foreign Direct Investment (FDI) on most of the developing countries. For instance the BRIC (Brazil, Russia, India & China) are attracting many foreign multinationals to invest in their economy. According to Salvotore, D (2007), FDI usually is long term and is regarded to be stabilizing the host country. The developing economies have realized the importance and advantage of FDI in boosting the industrialization and encouraging economic growth. The highly regulated FDI regime was liberalised and newer reforms in FDI policies were introduced in 2003. The economy also started boosting after the post liberalisation period i.e. 1991. Paula (2008) states that the relaxations in the FDI regulations in 2003 by the government of India have been a significant factor in augmenting the inflow of FDI in the Indian economy. Since 2003, enormous amount of FDI has come in India through multinational and international firms and various other foreign investors which led to the growth of the country.

Therefore the proposed aim of my dissertation is to find out the determinants for the inflow of FDI in India and find out the key sectors which are most attractive for foreign investment in the Indian market.

Research Objectives:

The main objective of this research is to examine and assess the pros and cons of FDI and the factors responsible to the growth of the Indian economy and this will be achieved through:

Analyzing economic performance of India from 1991 to 2008.

Identification of whether FDI, directly or indirectly contributes to the economic development of the emerging economy like India.

Examination of the determinants of FDI in India

Investigation of key sectors for FDI in Indian market.

Determination of appropriate mode of entry for FDI inflow in the Indian market with reference to the market conditions.

Rationale behind choice of subject for this research:

Economics has been one of the beloved subjects of the author of this research. After completion of his graduation in Commerce with specialization in Tax, Auditing and Economics, the author has worked closely with a research analyst in a private firm called Bio-Tech Envirocare Private Ltd. in India. While working with this firm, he has gained many opportunities to keep a track of foreign direct investments in Indian economy with respect to the Pharmaceutical industry as the firm had its core business operations in that industry. But this has encouraged the author to take up this research on a broader aspect and take into consideration the Indian economy as whole and explore its core potential, capacity and capability. And due to this the author has been able to contact some professional research experts and get their precise views on the development of FDI in India.

Research Design:

According to Bryman and Bell (2007), research design is a methodical plan which directs the proposed research. It’s a blueprint of an entire research.

My Research plan includes:

Collection of Data

Analysis of Data


Findings and Conclusion

Literature Review:

I.A Moosa (2002) describes Foreign Direct Investment as the process where residents of one country (known as the source country) acquires ownership of assets for the purpose of controlling production, distribution and other activities of a firm in another country (known as the host country). FDI recently has been one of the major elements contributing in the global economy. Sinha (2008) states that some of the main reasons for FDI in developing economies is shortage of domestic capital due to limitation on internal savings, insufficiency of public funds and technology gap between the developing and developed countries. All this creates demand for huge external capital for undertaking huge projects and indirectly promoting growth. The importance of FDI in developing countries is a post 1991 scenario where the importance of BRIC economies was discovered. Indian economy being one from the BRIC economies and also amongst the world’s fastest growing economies is expected to play a key role in the future world economy. The October 2003 edition of the Global Economic Paper of Goldman Sachs has an article “Dreaming with the BRICs- The Path to 2050” which clearly states the importance of India as compared to Brazil, China and Russia. India’s trade and investment complete picture was basically divided into the pre-1991 period and the post-1991 period. The pre-1991 period in the Indian Economy showed immense restrictions in the policies for foreign investment. The involvement of foreign entities was categorized into financial participation and technical participation and this was heavily monitored as to what is the intention of the company who wanted to invest in a local firm. Sectors were specially specified as to which are open for technical participation and which for financial participation or both. Technical collaborations were given more importance as this involved introduction of new technology and know-how by the foreign firms and at the same time restricted the foreign control over the local firms. The Foreign Exchange Regulation Act, 1973 (FERA) had been introduced which gave very high preference to the Indian companies and many foreign multinationals like Coca Cola had no other way than to close down their operations in India as foreign firms were asked to reduce their equity holdings in Indian companies to less than forty percent. During the period of 1959 to 1979 the total of the foreign investment approved by the government was dropped down to $70 million which resulted in negative net inflow (Kumar 1994). The pre-1991 period laid a platform for the FDI as the industrialization policies, economic atmosphere and immense human capital attracted more FDI towards India. And then came the post-1991 period. The post-1991 period saw many relaxations in the FDI policies and licensing act was also positively amended with many relaxations. Many sectors of the economy were opened to automatic approval of more stakes in the company. Many recent positive steps have been taken by the Indian government to facilitate the increase in the FDI in many sectors. FDI in India is controlled and regulated under the Foreign Exchange management Act, 1999 by the Reserve Bank of India. The entry mode for FDI in India is predefined through joint ventures and collaborations and investments in a local company by a foreign entity. FDI involvement was automatically approved for equity up to hundred percent was legitimate for sectors like distribution, communication and electricity for the investments which didn’t exceed Rs.15 billion. After 2002, greater importance for FDI was given as a new sub-section was created in the Indian industry which specially looked after the FDI needs and its improvement. In 2004, a new committee was formed which headed by Rattan Tata, where this committee made frequent visits to the industrial places in India where there was a absolute need of investment and held meetings with large overseas companies to bring those places in light.


To achieve the stated research objectives,

The author will mostly be relying on secondary data which includes text books by various authors, online journals and published articles, featured articles on the Financial Institutional websites, articles from database websites like Science Direct and Emerald and also with help of Google search engine. Most of the statistical data will be accessed from the official websites like Reserve Bank of India, OECD and International Monetary Fund (IMF), The World Bank and past UN annual reports.

The basic strategy used in the research will be methodological triangulation which involves both qualitative and quantitative methods of analysis. The author of this research is also partly relying on the primary sources as he will be interviewing several research analysts from India, United Kingdom and the European Union by sending them a questionnaire with 9-10 questions and on receiving their answers qualitative analysis will be done so as to get a actual trend of the determinants of FDI and its effects. Also video conferencing will be involved with a research analyst from India with the help of Skype.

So as to the design of the research is concerned, the type of research selected by the author is Retrospective study i.e. trend studies which looks back in time for the happening of past events and find a particular trend in it. Probability and Non-Probability sampling method will be used to give a proper approach to each and every step taken in this research. All the data will be categorized in these two categories and then a trend will be extracted from them.

Contribution of the Study:

This is an extended research on many previous researches in the same context but this research specifically covers the whole Indian economy on a broader view rather than concentrating on a single sector only as this does not give an actual trend of the country’s performance, attractiveness for FDI and further potential for sustainability.

The existing literature shows that there are limited studies that have actually concentrated and researched from India’s point of view. And hence the author of this research has chosen to have an extended research on this topic.

Hence this study will fill the gap in the literature by analyzing with a broader view of FDI in India as compared to the narrow approach of FDI in India as this research will cover the Indian Economy on a whole and not a specific sector only.

Time Schedule:

A time schedule is very important in a project so as to properly align the responsibilities and to impose restrictions on the author of this project for the timely completion of this project. The time scale for this research is set as follows:

June-July (2010)

Selection of topic

Literature Review

Approval from Tutor

July-August (2010)

Collection of Data

First draft of proposal


August-September (2010)

Proposal approval from tutor

Changes in the proposal (if any)

Re-approval from tutor (if necessary)

September-October (2010)

First draft of actual dissertation

Approval from tutor

Changes in the first draft (if any)

Re-approval from tutor (if necessary)

Final draft of dissertation

Final approval from tutor

Submission of Project

A detailed Gantt chart will be prepared for the whole of the project with the inclusion of all the minor details.

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Examination of the UK Stock Market


There has been much academic discourse on fund managers stock valuation and recommendations using style investment strategies. Though there is weighty empirical evidence to suggest that value stocks outperforms growth stocks using different commonly used valuation indicators in international equities

The above result is also consistent with results observed in the UK market. Relevant literature discussed in this proposal shows that when ranked according to price-to-earnings, price-to-book, price-to-cash-flow and dividend yield, Value shares outperformed growth shares in UK market. There are divergent views in explaining the rationale for this result with some authors stating that value premium is as a result of its high risk while others believe a contrarian approach. The use of another valuation indicator the PEG ratio by analysts in stock recommendation is becoming popular. Despite the PEG ratio returning better performance when compared with P/E ratio. A comprehensive study of its use in classifying investment style has not been undertaken, especially in the UK market.

The focus of this proposal is that this research will examine the performance of value and growth stocks in the UK market and especially the introduction of PEG ratio in the study to widen the knowledge in understanding the rationale for the outcome of the results of earlier studies. Data from 1992 to 2007 will be used as the quantitative research technique to buttress this research

1.0 Introduction

One belief that is held in the investment world is the adoption of investment styles and the resultant performance of asset returns based on those styles. This belief according to Donald, 2008 “comprises of all that we know or think that we know about the ways asset returns are generated”. The commonly used investment style used by fund managers and investors is the value and growth styles.

Many empirical studies on this form of investment style have suggested that over the years, value shares outperforms growth shares irrespective of the valuation tool used fama and French (1992) and Lakonishok,Shiefer and Vishny (1994).In those studies the most commonly used valuation tools are the book to market and earnings to price ratios.

More recently fund managers are beginning to adopt another valuation tool the PEG ratio which adjusts the earning price ratio by its growth. The use of PEG ratio adjusts for one of the flaws of using P/E ratio in explaining difference in two comparable companies which is its growth rate Estrada (2005).Studies on this new valuation indicator is quiet scarce in measuring the performance of value shares against growth shares. Examining the outperformance of value shares over growth shares in UK becomes imperative with the use of this new valuation indicator and updated data that will be under study during this research.

Background study- London Stock Exchange

Due to the central geographical location of London with the other world timing zones making reference to it, London has assumed the financial centre of the world.

The London Stock exchange establish around 1700 has played a dominant role in the shaping the security market both domestically and intentionally Michie (1999). The capital market in London stock exchange according to Blake (2000) comprises of the FTSE 100, made of up the top 100 companies by market capitalization, FSTE 250,350 and ALLSHARE Index, each index comprises of the top total number of companies by market capitalization with the Allshare index making up the entire market.

The performance of the Uk market is consistent with the trends in other developed market when sorted by price to earnings.Fama and French 1998 found that annual returns of value stocks in UK were 17.46 while that of growth stocks were 14.81 in a data spanning between 1975-95.Before then using data from London Share Price database, showed that value shares(Lowest price/earnings ratio),had an annual of 17.76% while Growth shares (Highest price/earnings ratio) had an annual return of 10.80 in a data collected between 1961 to 1985 Tweedy,Browne,2008.Gregory,Harris and Michou (2001) updated the data from 1975-1998 and found that the average annual return over five years of portfolios sorted by earnings to price ratio show that the lowest rank deciles portfolio the (value)has a return of 24.62% while highest rank deciles portfolio (Growth)has a return of 20.64%.

Research Rationale.

The Uk Stock market has not been extensively studied in terms of the value and growth investment performance unlike the US. Garry, Harris and Michiou studies of 1975-1998 remains the most comprehensive study of Uk performance of value shares over growth share in Uk Xinzhong (2001).Moreover, to the best of my knowledge, previous studies have not use the PEG ratio as a valuation indicator to examine if the returns will be consistent with returns when measured with earnings price ratio.

1.3 Research Aim

The purpose of this research is to compare the performance of value and growth shares using both P/E and PEG valuation tools in London Stock Exchange

1.4 Research Objectives

To examine the performance of value stocks and growth stocks in the UK stock market between 1992-2007,using companies in FTSE 350(FTSE 350 is made up of 94% of total market by value).Which will be enough to describe market performance.

To examine if using the PEG ratio order than the P/E ratio used in other studies to classify the investment style, will give consistent explanation in the outperformance of Value shares over Growth shares.

To examine if the performance of Value shares and growth shares using current data sources will give a consistent result with earlier studies.

To establish using statistical analysis the significance of the result from the performance

2.0 Literature Review

This section would look at the views and writings of other researchers in the area of value and growth investment styles, and the usefulness of using either the P/E ratio or the PEG ratio in classifying the two investment styles in other markets. It would also show the contributions that have been made in this subject area particularly in the London Stock Exchange.

2.1 Value Vs Growth Investment style

Most investors in the equity market usually adopt style strategies in their investment decisions. This notion as explain earlier in this paper is termed out of the belief that has characterized most investment decisions, though most often, they are empirical evidence to support such beliefs. One of such belief is that of value shares and growth shares, empirical evidence in most markets studied so far shows that value shares outperform growth shares irrespective of the valuation indicator used. Using the mostly commonly used valuation indicators in classifying shares, value shares are generally defined as shares that have low earnings-to-price ratio in Basu 1977, low book-to-market ratio, Fama and French 1992, low cash-flow-to-price ratio, LSV, 1994, high dividend yield Keppler 1991 and low Price-to-earnings-growth, peters, 1991.While growth shares are regarded as shares that have high values of those valuation indicators described above and low dividend yield.

2.1.1 Price-to Earnings

In a study of over 500 stocks in US spanning a period of between 1957 to 1971,sorting the stocks from lowest P/E (value)to highest P/E (growth) portfolio,Basu,1977 showed that the lowest rank portfolio(value) stocks had an average annual rate of return of 16.3% while the highest ranked portfolio had an average annual rate of return of 9.3%.The outperformance of value stocks over growth stocks is also consistent with Fama and French study in 1992 using the same US market, with value stocks outperforming growth stocks with 0.68 points. In examining the effect of P/E ratios in Contrarian strategy,LVS, studied stocks in NYSE and the AMEX and sorted them according to their P/E,the result of the five years holding period investment returns shows that portfolios ranked by low P/E had an average annual return of 19.0% with highest ranked portfolio returning on average over the same five year period,11.4% LVS.1994.This consistency of the value stocks performance prompt Bauman, Conover and Miller to study 20 other established markets to understand if the performance of value stocks and growth stocks will yield similar results as that of the US market, in a study spanning 10 years, the result of their study also showed that value stocks outperformed growth stocks in all the market studied with different valuation indicators including price-to-book ratio introduced by capaul-Rowley-Sharpe, Bauman, Conover and Miller,2000.They also found that the performance observed had a firm size effect.

Using updated data, Chan and Lakonishok, 2004 provided further evidence of the earlier results obtained from other studies done even when sales-to-price ratios were included in the valuation indicator. Their result also shows that irrespective of whether small cap or small cap stocks are considered, the value stocks outperformed growth stocks. They used the same methodology to study non-Us markets and observed the same result reported earlier by Bauman, Conover and Miller

2.1.2 Book-market ratio

This valuation method is used to identify shares that are trading in the stock market at either below their book value or above their book value. Value shares are classified as shares that trade at the stock market at less of their book value or intrinsic value while growth shares are classified as shares that trade at the stock market at above their book value.

Fama and French championed the evidence in further support of the performance of value stocks over growth stocks in their study of non-financial stocks in US market between 1963 to 1990, taking into consideration another factor in stocks returns, the market cap. They observed that stocks with lowest price to book returns better performance than stocks with highest price to book value and that in all the portolios,companies with smaller market cap also performs better than large cap stocks,Fama and French 1992.

The evidence above was also supported by Debondt and Thaler, ranking stocks in the US market based on their book value observed that returns of portfolio for lowest price/book value stocks performed significantly better than portfolios formed with highest price/book value stocks, taking cognisant of their returns prior to portfolio formation and after portfolio formation, Debondt and Thaler 1987.

International evidence of this study was provided by Sharpe, Capaul and Rowley 1993, in a study of major markets around the world including the US, stocks were ranked according to price to book value and formed into portfolio of value and growth. This study also included the UK market for a period of between 1981 to 1992.The result of their analysis shows that in all of the countries studied, value stocks outperformed growth stocks.

2.1.3 Cash-Flow-to Price

The ranking of portfolio according to cash-flow to price, in evaluation of value and growth investments, showed according to evidence from LSV, 1994 for portfolio formed between 1968 to 1990 in the US market. The result of the returns show that portfolio ranked by lowest price to cashflow ratio outperformed portfolio ranked by highest price to market ratio by 10.6 points. Further evidence from returns on strategy discovering undervalue stocks based on low price to cashflow ratio,Keppler,1991 noted that, empirical evidence from international equities supports that low price to cashflow stocks outperformed high price to cashflow stocks.

2.1.4 Price-Earning Growth

As already noted earlier one of the shortcomings of using P/E ratio to classify shares is its inability to differentiate two comparable companies. Though the classification of investment styles using PEG ratio is still very scarce in literature. But the increasing significance of its use can not be overlooked. According to Estrada,2005,studies on portfolios sorted by PEG, lowest ranked portfolios outperformed highest ranked portfolios between 1982 to 1989.That was the earliest study done in PEG valuation indicator according to literature. Despite the shortcomings of using short-term earnings growth in estimating PEG, Easton 2003, observed a high correlation between estimation of expected rate of return of stocks using PEG when compared to estimation of returns using P/E ratio. In his study of how analysts use earnings forecast in generating stock recommendation Bradshaw, 2004, observed that analysts incorporate earning forecasts in their recommendation and the tests indicate that they value and recommend stocks based on the PEG ratio. Further evidence of the increasing use of PEG ratio in ranking stocks by analysts in international context was provided by Barniv, Hope, Myring and Thomas, 2009.They observed that the strong positive relationship between analysts recommendation in US using PEG ratio also extend to other strong investing countries, although they noted that there is a negative relationship between analysts recommendation and future returns. Despite this evidence to show that analysts use PEG ratio to recommend stocks, there seems to be less work on the evaluation of performance of value stocks and growth stocks using this valuation indicator. Though one can argue that since there is no relationship between analysts recommendation and future returns of stock, according to empirical evidence and since according to evidence from Estrada, 2005, the holding period return of stock valuation using P/E outperforms PEG ratio, that there should not be any need for study of the investment style performance of stocks using PEG ratio. But when assessment of returns includes the risk factor, the PEG ratio outperforms the P/E ratio in most risk assessment measures and assessing stocks return will be incomplete without implying the risk factor.

2.2 Value Vs Growth Investment Style in UK

The UK market being one of the strong investors market in the world, evidence of the performance of value shares and growth shares is consistent with the results of the US markets and other international markets described above irrespective of the valuation indicator used. When classified according to book to price value, Sharpe, Capaul and Rowley 1993 observed that low book to price shares outperformed high book to price shares by 31.5%, between 1981 to 1992. The performance of the Uk market is consistent with the trends in other developed market when sorted by price to earnings.Fama and French 1998 found that annual returns of value stocks in UK were 17.46 while that of growth stocks were 14.81 in a data spanning between 1975-95.Before then according analysis of data from London Share Price database, showed that value shares(Lowest price/earnings ratio),had an annual of 17.76% while Growth shares (Highest price/earnings ratio) had an annual return of 10.80 in a data collected between 1961 to 1985 Tweedy, Browne 2009.Gregory,Harris and Michou (2001) updated the data from 1975-1998 and found that the average annual return over five years of portfolios sorted by earnings to price ratio show that the lowest rank deciles portfolio the (value)has a return of 24.62% while highest rank deciles portfolio (Growth)has a return of 20.64%.When ranked according to dividend yield, shares with high dividend yield are classified as value shares while shares with low dividend yield are classified as growth stocks. Levis 1989 observed that value stocks outperformed growth stocks by as much as 6.3% on annual investment return.

The consistency of these results has not been tested in the UK market using PEG ratio. The higher return on risk-adjusted measure of performance shown by stocks valuation using the PEG ratio over P/E ratio makes this study very important.

Though the consistence of value stocks over growth have not been attributed solely to either the valuation indicator used or investment style adopted.Fama and French attributed it to the riskiness of value stocks, but in his conclusion of empirical evidence studied, Chan and Lakonishok stated that investor’s behaviour could be at the root of this results.

2.4 Summary

This review of major studies in this section shows enormous work that have been done in examining value and growth stocks using different valuation indicators and still providing consistent results of outperformance of value stocks. Since there is still not a consensus among researchers as regards the explanation of this results. It shows that there is still ongoing research into understanding a testable rationale for choosing value stocks over growth stocks.

3.0 Methodology.

Quantitative research design connects research questions to data Punch 2005, p63. The research design will be to compare the performance of value and growth shares in the London Stock Exchange over the period to be studied. The P/E and PEG ratio will be the valuation indicators to be used.

In this section, the data collection and source procedure, portfolio formation approach, performance measures to be used in analyzing the research topic will be discussed. A framework of the timeframe to undertake this research will also be set.

3.1 Data Collection and Sampling

The benchmark to be used in the analysis will be the FTSE350 Index. The FTSE350 Index is made up of 94 percent of the market capitalization by values, which will be enough to describe the market performance. The data will be collected on monthly time series. The P/E ratio data will be sourced from DataStream and the preceding growth rate also from DataStream will be used to adjust the P/E in other to get the PEG ratio for the companies. The data type described above will be the primary data. The secondary data will be sourced from existing financial academic journals, unpublished conference papers and revered textbooks.

3.2 Portfolio Formation

The approach to be used in forming the portfolio will be that at the end of each preceding year that the portfolio will be formed, the data P/E ratio and earnings growth rate of the companies in FTSE350 in that year will be sourced from DataStream i.e,the portfolio to be held in 1992,will be formed at the end of 1991 and assumed to be held through-out 1992 before being sold at the end of 1992.The P/E and PEG ratio will be ranked from the lowest to the highest and divided into deciles. The lowest ranked deciles will form the value portfolio in that order to the highest ranked that will form the growth portfolio.

3.3 Analytical Methodology

Analysis of the data will be done using both economic and statistical analysis. Each analytical method intends to answer fundamental questions regarding the outcome of the results.

3.3.1 Economic Analysis

This is the analysis of the performance of the returns of both the value and growth portfolios. It intends to answer the question of which portfolio outperforms the other within the period investigated. It also intends to answer the question of which of the two valuation indicators gives a better indication of the performance of the portfolios i.e using P/E ratio and PEG ratio, which of them is mostly useful in valuing stocks. In economic analysis the financial measure of risk and returns is the most commonly used method. The method of risk and return assessment depends also on the method of risk to be considered. The risk assessment method to be adopted in assessing the portfolio for this research includes; Sharpe ratio which uses the standard deviation as a measure of risk, the Treynor ratio that uses the beta of the security as a measure of risk. These two ratios uses the two traditional measures of risk i.e. the beta and standard deviation in evaluating performamce.Another method of evaluation performance to be used in this research though not widely used as the former two, is the risk-adjusted return. Since the aim of this research is to examine the performance of value and growth shares, the use of risk-adjusted return will be appropriate since it is useful in comparing portfolios at different levels of risk Bacon 2004.The risk and return will be evaluated using the FTSE 350 Index as the benchmark and the returns of the shares in each portfolio will be based on value-weighted with the market capitalization as the value.

3.3.2 Statistical Analysis

The statistical analysis intends to answer the question of the significance of the variable in explaining the returns. In this case the significance of P/E and PEG ratio in explaining the returns of the portfolio. The hypothesis to test here will be the statistical significance of the valuation model used in explaining the outperformance of one of the valuation indicator used over the other.

3.4 Timeframe.

Given that the research will be carried out over a period of three months, the following timeframe have been set to actualise the objective.





June -09



Make corrections on

submitted proposal based on

Feedback given from supervisor.


Initiate collection of primary data

And formation of portfolio


Meet With Supervisor –discuss

primary research plan and get the

required advice


Start data analysis





Expand more on secondary research, review introduction and literature review




Meet with supervisor to review

Data analysis done so far




Data interpretation



Meet with supervisor to discuss results



Bring findings together and prepare


conclusion and recommendation


Put finishing touches to project

and prepare to submit.


4.0 Results/Conclusion

The main aim of this proposal to show how the examination of value and growth shares in the UK market using PEG ratio can give a further insight on the consistency of the outperformance of value stocks from available empirical evidence. And since the study of PEG ratio in ranking stocks for classifying investment style is still scarce in literature especially in UK market. This will be an attempt in exploring that gap in knowledge which is the aim of this paper.


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