Literature review chapter - Essay Example

Dissertation Draft Privatization of Mobile Telecommunications Company in Kuwait: The case of, Zain Company HashemAlaqeel 16010000 Literature Review In economics, privatization is considered as an important instrument. Privatization is the abolition of barriers within the public sector; it is the transfer of control or assets from the public sector to the private sector (Al-Omar, 1996). The primary objective of privatization is to incorporate the private sector, and to expand market. The decreasing influence of the governments in businesses across the globe clearly indicates the positive impact of privatization on business worldwide (Alonso, et al., 2013). Globalization has presented itself as a crucial determinant for paving the way for privatization of commerce across the globe.

Case studies portraying thebenefits of privatizationThe development of private enterprises have shown growth over the last few decades, this expansion in the private sector is attributed to the benefits that privatization brings along (Dahel, 2001). The contribution of people towards Gross Domestic Product (GDP) generation is maximized through privatization. The margin of innovation becomes broader, and companies may define their policies according to their status.The freedom of decision making has been supportive towards the idea of privatization.

Privatization seems to be an appropriate policy for increasing quality and variety in telecommunication industry. In 1992, the Kuwait Investment Authority began 3 phases plan of privatization. The aim of this initiative was to reconstruct the economy, and minimize the dependence on revenue generated by oil. The policy of privatization was devised in such a manner that it could entertain domestic as well as foreign investor. The five different methods that were employed by the Kuwait Investment Authority include Sale of Government Shares, General Tendering, Management Contracts, Lease Arrangement, and Cooperation with the Government.

However, privatization is not a compulsion efficient provision of services(Doh, 2000).Heracleous (1999) studied the case of Singapore, and analyzed its public owned telecommunication sector that offers the quality of services according to the world standards. Further, Heracleous (1999) has dichotomized the debate of ownership, and its effects on the performance of an organization. The management team of an organization is authorized by the owners to manage the affairs, therefore, it does not matter who owns the company, as far as the administration of the organization is making the right decisions (Heracleous, 1999).

Heracleous (1999) reveals important aspects of the privatization debate in the telecommunications industry. By discussing the unique and singular example of the SingTel Corporation, Heracleous (1999) shows how privatization of a state-owned telecommunications company can bring huge dividends to the industry when a clear link is drawn between the objectives of the company and national economic objectives. When compared with findings of earlier scholars such as Kok (1992), Heracleous (1999) shows the benefits of a privatization and ‘phased liberalization’ strategy when not carried out as an immediate response to mounting criticisms of efficiency in the state-owned telecommunications enterprise.

He further claims that marrying privatization of the telecommunications industry to the broader economic development in the country gives sufficient time to management for developing appropriate regulation and institutional policies for making the company competitive. This study provides an interesting perspective to the discussion of the strategies to increase competitiveness of the telecommunications industry. Kang (2009) has offered a case study of Chungwa Telecom Company (CHT Co.), the study was based on analyzing the change in efficiency of telecommunication services in the company before and after privatization.

The study used time series data for investigating the proposed statement. The data envelopment analysis (DEA) model was used to gauge the changes in the efficiency of the company (Kang, 2009). The results obtained from these analysis, showed that there was no significant improvement in the performance of the company. The system remained inefficient even after privatization; this outcome reflects the importance of management teams within a company. Herrera (1993) has provided an overview of the privatization of ENTel.

ENTel was a part of state own enterprise in Argentina. The quality of services was below the standards, and there were frequent complaints by the users. The increase in fiscal pressure and public debt put ENTel into an uncomfortable situation, where it required the help of an external savior. In 1989, the company was privatized. The privatization of ENTel was brought through change in the structure of organization and economic setup. Privatization of ENTel lead to the expansion of telecommunication sector within Argentina, and it also improved the quality of services (Herrera, 1993).

Towards the end of her analysis, Herrera (1993) appears skeptical about the promise of increased efficiency and higher performance levels in the Argentinian telecommunications industry following the privatization program. The ills which affect privatizations efforts in developing countries have been foreseen in the case of Argentina’s newly privatized telecommunications industry as well. Herrera sees a situation where even after the privatization of ENTel the monopolistic powers of the state-owned enterprise will not come to an end.

On the other hand, the very regulatory framework that has been set up to regulate the activities of the private telecommunications companies is expected to cater to the creation and sustenance of monopolistic and duopolistic setups in the industry. This may be a warning sign for other developing countries which may need to develop robust regulatory and institutional policies in order to prevent the creeping in of vested interests while promoting customer-friendly outcomes of privatization.Appiah-Kubi (2001) studied the impact of privatization program in Ghana.

The study was aimed at analyzing the effect of privatization within the country, and determining the positive and negative impacts on the country’s economy. The study focused on the privatization period from 1987 to 1999. The results of the study showed some positive outcomes that encouraged the process of privatization in the longer run. Another feature of this study was to outline the future of privatization in the country (Appiah-Kubi, 2001).Amulya and Anand (2012) conduct a study to show that privatization of the telecommunications industry in India has made it more responsive to the macroeconomic factors in the economy.

They argue that being one of the largest telecommunications industries in the world, the Indian telecommunications industry needs to be competitive and efficient if it is to invite FDI and collaborative opportunities for growth from international quarters. The findings that privatization has been beneficial for the Indian telecommunications industry testifies to the merit in Kok’s(1992) claim that developing countries seek to privatize telecommunications industries to make them more conducive and attractive for growth.

Furthermore, Kok (1992) claims that this strategy enables the telecommunications industry to become well-integrated with the rest of the economy in developing countries. This has been found to be true in the Indian experiment where according to Amalya and Anand (2012), since privatization, the telecommunications industry has become more responsive to macroeconomic factors in addition to becoming better in performance and service quality.Disadvantages of privatizationKang’s (2009) study illustrates the disadvantages of privatization brought about by loss of economies of scale.

Since the state-owned enterprise is no longer the sole service provider in the telecommunications industry and does not enjoy its traditional monopoly status, the loss of a large customer base reduces the cost savings and efficiency of operations. Although several private companies offer reduced costs in the course of competition for a common set of customers, Kang’s (2009) findings show that the efficiency of internal operations as well as technical efficiency suffers a loss in the aftermath of privatization of telecommunications industries.

When viewed with other studies such as those by Kok (1992), Heracleous (1999) and Amalya and Anand (2012), a wide landscape full of different possibilities and outcomes for privatized telecommunications industry is apparent. Hence, governments may need to view their peculiar economic and institutional interests and objectives to evaluate the potential of privatizing their telecommunications industries.Importance of privatizationPrivatization has more positive impacts than negative; it has been observed that the evolution of private sector instills competition that motivates the management of private enterprises to maximize their performance by improving their service delivery and quality of produce.

Privatization offers opportunities for employment (Ros, 1999). The expansion of businesses is unlimited as there are no restrictions for importing and exporting goods (Symeou, 2011). The level of work motivation is also affected by the privatization of businesses (Gutiérrez & Berg, 2000). Privatization and liberalization are often used as synonyms, though there is a link between the two, but there are contrasting differences between the two (Rouibah, 2014). Privatization is about ownership, while liberalization is about freedom (Sun & Tong, 2003).

A company dictated by the owner often falls short of giving its maximum performance, while an organization promoting liberal culture of integration and expansion provides hope of performance improvement. Incentives that entice governments to privatize the businessAharoni (1988) have reviewed the different motives that make governments privatize their assets or controls. The term privatization has multiple strings attached to it, and it includes a diverse range of alternates that governments can opt for upgrading the service provision.

Moreover, the reasons that motivate governments to privatize its assets include shift in power, devolution of unit, ideology, and political scenario. The decentralization of economy offers an alternate for the public sector to minimize the public debt. Thus, liquidation of state owned enterprises offers opportunities for the expansion commerce. The leverage of customizing the produce also enhances the customer satisfaction (Aharoni, 1988). The motives for privatization identified by Aharoni (1988) can be expected to bear the intended fruits to the extent that these policies are framed in conjunction with an overall plan to liberalize and revitalize a stagnant economy.

If privatization is undertaken solely to alleviate acute economic and fiscal pressures on the government, then the privatization may be carried out in a hurried and haphazard manner which could prevent the execution of privatization in the most economically favorable and efficient way. These risks have been identified in a number of other studies discussed in this review such as the work of Heracleous (1999) and Herrera (2003). These studies point out the particular risks of a reactive and unregulated privatization policy in developing countries.

The scope of privatization is unlimited, and it offers flexibility to owners and partners of private enterprises. It enhances the circulation of wealth, and stabilizes the development within a country. The role of foreign investors becomes more prominent in case of privatized market, the responsibility of stakeholders gets distributed (Hertog, 2007). Besides economic development, there are socio-political determinants that also affect the privatization of business within a region. However, the process of privatization has only been studied from economic point of view, while the socio-political strings attached to the idea of privatization have been ignored.

However, the paper will only expound the process of privatization from economic point of view due to limitation of time and the requirement of the paper. Appiah-Kubi’s (2001) work presents findings that are typical of developing countries. It is an important study because it highlights factors other than economic efficiency and the demand-supply interaction in the market to evaluate the success of privatization efforts. Factors that affect the effectiveness of the privatizationThe study shows that corruption, nepotism and similar social evils can dampen the effectiveness of privatization efforts on the privatized firms.

The study recounts events such as the high level of liabilities that the privatized firms inherit from their public-sector parent companies. Despite aggressive sales, Appiah-Kubi (2001) explains that the privatized telecommunication companies are unable to generate sufficient revenues to eliminate the legacy liabilities off their balance sheets. On the other hand, nepotism and favoritism exercised at the time of making decisions relating to divestment of state-owned corporations further limits the commitment to efficiency in private companies.

These factors may be present in a number of developing countries across Asia and Africa.Privatization as multi-lithicKok (1992) describes privatization to be multi-lithic; he offers two strategies behind privatization. The first strategy is usually opted by the developed nations who attempt to minimize the dominance of state in economy, while the second strategy is aimed at restructuring the economic setup within developing or under developed countries, where the load is heavy, and the setup is inefficient to perform its function.

Kok (1992) has also offered three models of privatization that include the financial model which has an ideological overtone, which in itself acts like a goal; it is prevalent in developed economies. The strategic partnership model which is mainly aimed at attaining the defined objectives through developing infrastructure; this model is prevalent in developing companies. And the emerging European model which has no material existence, though it has the potential to be materialized. Much of what Kok(1992) had prophesized in the early part of the 1990s had been realized a decade later and is shaping emerging telecommunications industries in various countries.

In developing countries such as China, Bangladesh, India and Pakistan there has been a rapid penetration of mobile telecommunications services as a result of the deregulation of the industry which has seen a number of multinational telecommunications companies enter those markets and build up the telecommunications industries in those countries. Thus, it may be said that the strategic partnership model is practicable at least in the case of companies in developing countries and emerging economies.

Myanmar, a country in Southeast Asia, is regarded as one of the final middle-sized potential markets for telecommunications industries. There too, the strategic partnership model between the government and international telecommunications companies such as Telenor is taking shape. The company as recently as February 2014 acquired licenses to provide mobile telecommunications services in the country (Telenor Myanmar, 2014). Megginson and Netter (2001) have inducted empirical studies on privatization.

The main purpose of their empirical study was to identify the trends that were common in various studies, and the conclusions drawn by those empirical studies. The work documented in this field outlines the involvement of political players in defining the economic policies (Lestage, et al., 2013).Telecommunication is a rapidly evolving industry; the development in this area is attributed to new discoveries, and customers’ utility. Until 1990 the number of independent telecommunication regulation agencies in the world was only 10, however, over the last two decades the number of independent telecommunication regulation companies has risen to a total of 84 (Samarajiva, 2000).

Competition has always been considered as a crucial determinant that paves the path for reformation. Samarajiva, (2000)has elaborated the role of competition in liberalization of telecommunication market in Sri Lanka. According to Samarajiva (2000) there are three components of institutional reforms, they include organizational reforms (corporatization and privatization), the introduction of competition, and the establishing regulations. Further, Samarajiva(2000)argues that countries with low population density must devise strategies to invite foreign investors to develop networks.

Kuwait, also has a relatively lower population density, therefore, quoting the case of Sri Lankan privatization strategy seems quite appropriate. Telecommunication has attained a permanent spot in the lives of the people (Maillé & Tuffin, 2014). The lightning fast mode of communication has shifted the paradigm; it has minimized the distances and maximized the efficiency of work. There is a huge variety of customers who avail the services offered by the telecommunication companies (Newbery, 1997).

The variation in the type of customers, demands for a range in the packages, data bundles and services. The provision of telecommunication services is not limited to the borders, their multinational organizations that are involved in providing services to the people across the borders (Rajasekar & Al Raee, 2013). In the early days of telecommunication, most of this sector was dominated by the public sector. With a gradual change in the technology, the telecommunication departments owned by the public sectors started to get devolve, and private enterpriser started to take hold of the businesses (Ramamurti, 2000).

There are still some countries where telecommunication is still managed by the public sector, but even in those countries there are private companies who are providing telecommunication services and products. Since 1980s the telecom industry in developing countries is undergoing dramatic transformation. Wallsten (2001) has econometrically analyzed the reforms taking place in the African and the Latin American countries. The study encompasses 30 nations in these two regions that have undergone reformation in telecommunication sector.

The outcomes of this study indicate that the reforms in telecommunication sector were directed, and they achieved their objectives that were primarily defined by the policy makers.Evolution of technologyThe evolution of technology demands for greater channels, it requires a broader horizon, and more room for experimentation. The scope of experimentation is quiet limited in case of economic structure. However, calculated risk is incumbent part of growth. Expansion cannot occur without the desire of moving forwards, and every step seems risky, especially when the stakes are high.

In the current scenario the idea of state owned enterprises is losing its popularity, the reason being the competition and the load of work. The competition from the external market and the demands of the public has damaged the reputation of public sector as self-sufficient. However, it is not always the case; some countries do offer efficient service through public enterprises. Privatization is a product of capitalism, where investments are made to multiply the wealth. Whereas in state own enterprises the monopoly is dominated by few.

The transfer of control to private sector ease down the burden on the state, but it limits the government’s say in the commerce of the country. The devolution of power and the propagation of autonomous bodies are treated as a healthy sign. Independence of companiesIndependent companies have the right to make their own decisions; they have the leverage of upgrading their organizational structure. Further, the freedom of innovation is also worth mentioning. Usually, it has been observed that businesses dominated by the state offer poor services, and there is slight or no room for innovation.

The major reason behind state’s conservatism is fear of losing stability; the fear of falling short of meeting the goals, prevents governments to opt for a conservative approach. The job of the state is to maintain order within a country, and it is demanding a job. To establish law and order, the governments are bound to keep a conservative approach. The lack of freedom and the insecurity force the government to limit the room for innovation. On the other hand, the rapid advancement in technology has increased the demands of the people.

The increasing demands and poor response from the public enterprises generates a great degree of unsatisfied masses. The expansion of a market is directly proportional to the capital invested, and the customers entertained. The problem with the nationalized industrial sector is that public is not entertained up to their degree of satisfaction. The lack of resources and poor management by the public administrating bodies generates inequality among customers. Further, the involvement of political parties in defining the national policies often offends the demands of the people.

The reforms introduced within a sector are influenced by the invested interests of the governing party. The involvement of the political parties has been reported as a crucial element for determining the commerce of a country. Moreover, the level of corruption within the public sector is another reason that makes the taxpayers unsatisfied. Meanwhile, privatization in its ideal form eases down the load on the public sector. It propagates expansion, and creates opportunities for investment and employment.

Further, private enterprises are more focused; they intend to invest their energies in a particular direction. The empirical studies of telecommunication sector often suffer from endogeneity i.e. correlation between variables and error terms. Endogeneity often arises from multiple regression models such as omitted variables. The problem of endogeneity has its roots in the fact that some information has either been ignored or discarded. As Wallsten (2004) suggests that the analysis of privatization of telecommunication sector shows improvement in the performance of the industry, however, the comparison of performance of telecommunication industry must not be only on the basis of pre- and post- privatization.

According to Wallsten (2004), research must be designed to identify all the various factors that help the process of privatization, and results into better performance. Wallsten (2004) also criticizes the quick-fix approach adopted by governments around the world which compels them to offer an exclusivity period to a particular private telecommunications service provider. According to him, the exclusivity period contributes less to enabling the private company to improve its performance and offer competitive services to customers.

On the other hand, the exclusivity period only serves to increase the revenue to the government as a result of the privatization attempt. Wallsten (2004) further explains that this quick-fix measure helps governments to avert pressures of increasing price for telecommunications services and the public criticism likely to result from it. Hence, it is for this reason that Wallsten (2004) argues for a comprehensive analysis of privatization policies of governments in addition to traditional measurement of pre- and post-privatization outcomes, especially those in developing countries, so that the underlying reasons for specific privatization policies and instruments may be unearthed and examined critically.

The focused approach with competitive market setup induces the companies to give in their maximum (Wallsten, 2001). Further, bringing the latest technology to their customers and offering affordable price, generates the need of improvement within the organizational structure and production. The improvement with in a system is linked with the innovation. Companies invest money in research facilities to maximize their efficiency, and to provide the latest technology to their customers. Customers’ satisfaction is given great importance in the private sector, because companies cannot afford to lose their customers, while in case of state owned enterprise people do not have any other option.

Telecommunication industry has a dynamic nature; the companies involved in the business are locked up in a competition of technology. The development in this industry is taking place at a rapid pace. The very nature of this industry demands innovation, expansion and affordability. The three prerequisites of this industry are usually absent in the state own enterprises, therefore, privatization of telecommunication industry has become incumbent (Bortolotti, et al., 2002). A study shows that the average time required for a British national to have his personal landline connection was almost two years before the privatization of British Telecom in the 1980s.

Telecommunication industry is a progressive industry, which continues to expand. Countries that have had privatized their assets earlier are now the leaders in telecommunication industry. There are a large number of international telecommunication service providers that operate independently across the border. The existence of multi-national companies promises foreign investment in the developing countries. How economic outlook of a state contributes to privatization Moon et al., (1986) have studied the case of privatization of British Telecommunication.

The investigation offers a historical narrative of the events that took place around the process of BT’s privatization. The study of BT’s privatization suggests that the economic outlook of the country was turning downwards, and privatization became a need for survival. Though, initially only 51% of the company’s shares were offered in the market. This article indicates the importance of political scenario in defining economic policies (Moon, et al., 1986). Mrs. Thatcher’s denationalization stance towards her country’s industry was one of the major driving forces that led to the privatization of the British Telecommunication company.

Moon et al. (1986) also hint at the likely risk of conflicting interests in the state-owned telecommunications enterprise overshadowing the public interest of efficiency considerations. As shown in the previously discussed work of Kok (1992), the privatization of British Telecom appears to have been undertaken to reduce state control of economic enterprises and to rejuvenate a stagnant economy. Also, in relation to the arguments made by Heracleous (1999), Moon et al.’s (1986) analysis also exposes the effects of a reactive approach to privatization in the telecommunications industry.

The possibility that interest groups in the government and in the state-owned corporation could have influenced the privatization policy of British Telecom reveals the necessity of aligning telecom privatization policy with the broader economic and industrial policy objectives. However, as Moon et al. (1986) explain, the British Telecom privatization was the largest privatization of its time and provided lessons for such efforts in the future.Effects of industrial setupMiller (1994) has reviewed the case of privatization in the Great Britain.

The gist of this investigation was to evaluate the performance of industry in privatized setup, in comparison to decades’ old nationalized industrial setup. Miller argues that there are several problems associated with nationalized industrial setup. The state is unable to prioritize its goals, public has to wait more, and the cost of services and goods is relatively higher (Miller, 1994). The absence of competition allows these state owned enterprises to continue their traditional businesses.

Moreover, the absence of competitors, means that public does not have many options, and they are bound to submit themselves to traditional ways of inefficient services’ provision (Miller, 1996). Miller’s (1994) work also sheds light on an essential distinction between the strategies to carry out privatization of the telecommunications industry in developed and developing countries. He points out that the larger the state-owned telecommunication enterprise the more careful governments need to be when developing a privatization policy.

Miller (1994) emphasizes the need for governments to evaluate whether a sizable market which private corporations would be attracted to. The capabilities of the private sector corporations must be taken into account when deciding to privatize a state owned telecommunications company. However, as the markets in developing countries expand privatization is essential to serve a vast customer base demanding more varied services. State-owned telecommunications companies in the public sector can no longer be expected to provide a variety of services to millions of customers with high levels of performance and efficiency.

Privatization is becoming more of a necessity that governments should not ignore.Till the early nineties the Turkish Telecom industry was dominated by PTT (Posta-Telegraph- Telephone); however, in 1993 the two main firms that occupied the Turkish telecommunication were privatized (Ansal&Soyak., 1999). Ansal&Soyak (1999) have attempted to investigate the effect of the change in the ownership of the companies on the Turkish telecom industry. The study further analyzed the changes that were brought by the foreign investors in revolutionizing the country’s telecommunication sector.

There was a fair increase in the shareholding of these companies; moreover, the information collected from this study showed that the increase in research and development budget gave a boost to the performance of both companies. The study also offers a comparison between the two firms that are coded as firm “A” and firm “B”. Overall the study confirmed that privatization of telecommunication industry offers greater opportunities for expansion, and improvement.Telefonica was initially managed by the German government; however, it was privatized later on (Bel&Trillas, 2005).

The aim of this study was to analyze the element of collusion that might have been involved in the process of Telefonica’s privatization. The investigation carried out by Bel and Trillas (2005) shows that there were some arrangements between the company’s managers and the politicians. The problem of agency within the public policy was also highlighted by Bel and Trillas (2005). The main indicator for collusion in Telefonica’s case was the positive reaction of the politicians towards discretional powers that were transferred to the managerial staff.

The performance of European telecommunications has been analyzed by, the study used three performance measures for analysis, they include profit margin, labor productivity, and total factor productivity. Before performing the analysis two hypotheses were postulated. The first hypothesis was related to competition that privatization brings along, and the positive impact that this competition has on the management of the telecommunication companies. The second hypothesis was based on the age of privatized market, which states that countries which liberalized their markets earlier were in a better state.

The study used the United States of America and Japan as the benchmarks. The study showed that most of the European countries during this phase were in a transitional state, however, the United Kingdom and Denmark did show some positive results; while there were still countries like Greece that were hesitant in liberalizing their economy. Further the investigation proved that privatization alone cannot elevate the performance of an industry; there are other determinants as well such as management, competition and the scale of research.

Effect of infrastructure to privatizationZambia is one of those countries that have had a restricted growth in the telecommunication sector (Sumbwanyambe&Nel, 2011). The problem with the telecommunication sector of Zambia is that the country does not possess any infrastructure, and the stunted growth of this industry is similar to lots of other industries that have the potential, yet their development is compromised by the socio-political situation within the country. Sumbwanyambe and Nel (2011) have investigated the challenges that are faced by the Zambian telecommunication sector, especially those that have hindered the progress of liberalization, privatization and the reformation of the telecommunication sector.

The problem with the developing economies is that their infrastructure lacks the foundations that could ensure stability. The scope of state affairs is quiet large, therefore, the governing bodies often fall short of managing the whole system properly (Wheeler, 1998). The centralized form of governments makes it tough for the administrating units to identify the goals, and it creates confusion while prioritizing the objectives. Therefore, in the modern day most of the policy makers propose privatization of the state owned enterprises (Wilson, et al., 2014). The trend of privatization has had a struggling start; however, as the time is passing by more and more countries are embracing privatizations.

Fleischmann and Srikantaiah (2011) have used SWOT analysis to compare the independent production of mobile phones across four different countries, including India, Ethiopia, Kuwait and USA. The gist of this investigation was to analyze the strengths, weaknesses, opportunities and threats that mobile companies have in these four countries. In case of Kuwait Fleischmann and Srikantaiah (2011) suggest that the country has great potential for telecommunication development. However, the limited domestic market weakens the current standing of Kuwait (Fleischmann & Srikantaiah, 2011; Alonso, et al., 2013). Moreover, the increase in petroleum prices tends to drive economy for Kuwait.

Abbas (2013) has studied the case of Zain Company, a telecommunication company based in Kuwait. Kuwait is one of the most technologically advancedcountry in the Gulf region. A steady growth has been observed in the country regarding the telecommunication industry. Kuwait has the penetration rate of 150%, which is an encouraging sign for the telecommunication industry in the country. The results of this study show that the quality of services has an influential role on determining the performance of an industry (Abbas, 2013).

Quality of services is measured by analyzing the degree of satisfaction among the users. Khalifa et al., (2013) used parametric and non-parametric tests to investigate the co-relation between privatization, competition and performance of companies. The two other tools that may be used in place of parametric and non-parametric tools include Panel Data and Matching Method. The finds from these analysis shows that the numbers of mobile phone users have increased several folds due to the increase in the privatization of telecommunication sector.

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