Tamil Eelam Issue in Indian Politics

————————————————- Politics From Wikipedia, the free encyclopedia For the political magazine, see  The Politic. For other uses, see  Politics (disambiguation). Politics  (from  Greek  politikos  Ã¢â‚¬Å"of, for, or relating to citizens†) is the  art  or  science  of influencing people on a civic, or individual level, when there are more than 2 people involved. Modern political discourse focuses on democracy and the relationship between people and politics. It is thought of as the way we â€Å"choose government officials and make decisions about public policy†. [1] * | ———————————————— [edit]Etymology European Parliament The word  politics  comes from the  Greek  word   (politika), modeled on  Aristotle's â€Å"affairs of the city†, the name of his book on governing and governments, which was rendered in English in the mid-15th century as Latinized â€Å"Polettiques†. [2]  Thus it became â€Å"politics† in  Middle English  c. 1520s (see the  Concise Oxford Dictionary). The singular  politic  first attested in English 1430 and comes from  Middle French  politique, in turn from  Latin  politicus,[3]  which is the  latinisation  of the Greek politikos), meaning amongst others â€Å"of, for, or relating to citizens†, â€Å"civil†, â€Å"civic†, â€Å"belonging to the state†,[4]  in turn from (polites), â€Å"citizen†[5]  and that from (polis), â€Å"city†. [6] ————————————————- [edit]History The history of politics is reflected in the origin and development, and economics of the institutions of  go vernment. [edit]The state Main article:  State (polity) Sun Tzu The origin of the  state  is to be found in the development of the  art of warfare.Historically speaking, all political communities of the modern type owe their existence to successful warfare. [7] Kings, emperors and other types of monarchs in many countries including China and Japan, were considered divine. Of the institutions that ruled states, that ofkingship  stood at the forefront until the French Revolution put an end to the â€Å"divine right of kings†. Nevertheless, the monarchy is among the longest-lasting political institutions, dating as early as 2100 BC in Sumeria[8]  to the 21st Century AD British Monarchy.Kingship becomes an institution through heredity. The king often, even in  absolute monarchies, ruled his kingdom with the aid of an elite group of advisors, a  Council  without which he could not maintain power. As these advisors, and others outside the monarchy negotiated for p ower,  constitutional monarchies  emerged, which may be considered the germ of  constitutional government. [citation needed]  Long before the council became a bulwark of democracy, it rendered invaluable aid to the institution of kingship by:[citation needed] 1.Preserving the institution of kingship through heredity. 2. Preserving the traditions of the social order. 3. Being able to withstand criticism as an impersonal authority. 4. Being able to manage a greater deal of knowledge and action than a single individual such as the king. The greatest of the king's subordinates, the  earls,  archdukes  and  dukes  in England and Scotland, the  dukes  and  counts  in the Continent, always sat as a right on the Council. A conqueror wages war upon the vanquished for vengeance or for plunder but an established kingdom exacts  tribute.One of the functions of the Council is to keep the coffers of the king full. Another is the satisfaction of  military service  a nd the establishment of  lordships  by the king to satisfy the task of collecting taxes and soldiers. [9] [edit]The state and property Property  is the right vested on the individual or a group of people to enjoy the benefits of an object be it material or intellectual. A right is a power enforced by public trust. Sometimes it happens that the exercise of a right is opposed to public trust.Nevertheless, a right is really an institution brought around by public trust, past, present or future. The growth of knowledge is the key to the history of property as an institution. The more man becomes knowledgeable of an object be it physical or intellectual, the more it is appropriated. The appearance of the State brought about the final stage in the evolution of property from wildlife to husbandry. In the presence of the State, man can hold landed property. The State began granting lordships and ended up conferring property and with it came  inheritance.With landed property came ren t and in the exchange of goods, profit, so that in modern times, the â€Å"lord of the land† of long ago becomes the landlord. If it is wrongly assumed that the value of land is always the same, then there is of course no evolution of property whatever. However, the price of land goes up with every increase in population benefitting the landlord. The landlordism of large land owners has been the most rewarded of all political services. In industry, the position of the landlord is less important but in towns which have grown out of an industry, the fortunate landlord has reaped an enormous profit.Towards the latter part of the Middle Ages in Europe, both the State – the State would use the instrument of  confiscation  for the first time to satisfy a debt – and the Church – the Church succeeded in acquiring immense quantities of land – were allied against the village community to displace the small landlord and they were successful to the extent that today, the village has become the ideal of the  individualist, a place in which every man â€Å"does what he wills with his own. † The State has been the most important factor in the evolution of the institution of property be it public or private. 10] [edit]The state and the justice system As a primarily military institution, the State is concerned with the  allegiance  of its subjects viewing disloyalty and  espionage  as well as other sorts of  conspiracies  as detrimental to its national security. Thus arises the law of  treason. Criminal acts in general, breaking the peace and treason make up the whole, or at least part of  criminal law  enforced by the State as distinguished from  the law enforced by private individuals or by the state on behalf of private individuals.State justice has taken the place of clan, feudal, merchant and ecclesiastical justice due to its strength, skill and simplicity. One very striking evidence of the superiority of the royal courts over the feudal and popular courts in the matter of official skill is the fact that, until comparatively late in history, the royal courts alone kept written records of their proceedings. The  trial by jury  was adopted by the Royal Courts, securing it's popularity and making it a bulwark of liberty.By the time of the  Protestant Reformation, with the separation of Church and State, in the most progressive countries, the State succeeded in dealing with the business of administering justice. [11] [edit]The state The making of laws was unknown to primitive societies. That most persistent of all patriarchal societies, the  Jewish, retains to a certain extent its tribal law in the  Gentile  cities of the West. This tribal law is the rudimentary idea of law as it presented itself to people in the patriarchal stage of society, it was  custom  or  observance  sanctioned by the approval and practice of ancestors. citation needed] The state of affairs wh ich existed in the 10th century, when every town had its own laws and nations like France, Germany, Spain and other countries had no national law until the end of the 18th century, was brought to an end by three great agencies that helped to create the modern system of law and legislation:[citation needed] 1. Records:  From the early Middle Ages in Europe there come what are called folk-laws and they appear exactly at the time when the patriarchal is becoming the State.They are due almost universally to one cause: the desire of the king to know the custom of his subjects. These are not legislation in the sense of law-making but statements or declarations of custom. They are drawn from a knowledge of the custom of the people. Unwritten custom changes imperceptibly but not the written. It is always possible to point to the exact text and show what it says. Nevertheless, the written text can change by addition with every new edition. 2.Law Courts:  By taking some general rule which seemed to be common to all the communities and ignoring the differences, English common law was modeled after such a practice so that the law became common in all the districts of the kingdom. The reason why in the rest of Europe, there was no common law till centuries later is because the State in those countries did not get hold of the administration of justice when England did. One of the shrewdest moves by which the English judges pushed their plan of making a common law was by limiting the verdict of the jury in every ase toquestions of fact. At first the jury used to give answers both on law and fact; and being a purely local body, they followed local custom. A famous division came to pass: the province of the judge and the province of the jury. 3. Fictions:  Records and Law Courts were valuable in helping the people adapt to law-making but like Fictions, they were slow and imperfect. Though slowly, Fictions work because it is a well known fact that people will accept a cha nge in the form of a fiction while they would resist it to the end if the fact is out in the open.British parliament Finally there is the enactment of laws or legislation. When progress and development is rapid, the faster method of  political representation  is adopted. This method does not originate in primitive society but in the State need for money and its use of an assembly to raise the same. From the town assembly, a national assembly and the progress of commerce sprang  Parliament  all over Europe around the end of the 12th century but not entirely representative or homogeneous for the nobility and the clergy.The clergy had amassed a fortune in land, about one-fifth of all Christendom but at the time, in the 12th and 13th centuries, the Church was following a policy of isolation; they adopted the rule of  celibacy  and cut themselves from domestic life; they refused to plead in a secular court; they refused to pay taxes to the State on the grounds that they had a lready paid it to the  Pope. Since the main object of the king in holding a national assembly was to collect money, the Church could not be left out and so they came to Parliament.The Church did not like it but in most cases they had to come. [citation needed] The medieval Parliament was complete when it represented all the states in the realm: nobles, clergy, peasants and craftsmen but it was not a popular institution mainly because it meant  taxation. Only by the strongest pressure of the Crown were Parliaments maintained during the first century of their existence and the best proof of this assertion lies in the fact that in those countries where the Crown was weak, Parliament ceased to exist.The notion that parliaments were the result of a democratic movement cannot be supported by historical facts. Originally, the representative side of Parliament was solely concerned with money; representation in Parliament was a liability rather than a privilege. It is not uncommon that a n institution created for one purpose begins to serve another. People who were asked to contribute with large sums of money began to  petition. Pretty soon, sessions in Parliament would turn into bargaining tables, the king granting petitions in exchange for money.However, there were two kinds of petitions, one private and the other public and it was from this last that laws were adopted or  legislation  originated. The king as head of State could give orders to preserve territorial integrity but not until these royal enactments were combined with public petition that successful legislation ever took place. Even to the present day, this has always been the basis of all successful legislation: public custom is adopted and enforced by the State. citation needed] In the early days of political representation, the  majority  did not necessarily carry the day and there was very little need for contested  elections  but by the beginning of the 15th century, a seat in Parliam ent was something to be cherished. Historically speaking, the dogma of the equality of man is the result of the adoption of the purely practical machinery of the majority but the adoption of the majority principle is also responsible for another institution of modern times: the  party system.The party system is an elaborate piece of machinery that pits at least two political candidates against each other for the vote of an electorate; its advantage being equal representation interesting a large number of people in politics; it provides effective criticism of the government in power and it affords an outlet for the ambition of a large number of wealthy and educated people guaranteeing a consistent policy in government. citation needed] These three institutions: political representation, majority rule and the party system are the basic components of modern political machinery; they are applicable to both central and local governments and are becoming by their adaptability ends in th emselves rather than a machinery to achieve some purpose. [12] [edit]The state and the executive system The administration is one of the most difficult aspects of government.In the enactment and enforcement of laws, the victory of the State is complete but not so in regards to administration the reason being that it is easy to see the advantage of the enactment and enforcement of laws but not the administration of domestic, religious and business affairs which should be kept to a minimum by government. [citation needed] The  German Chancellery(Bundeskanzleramt) in  Berlin Originally, the state was a military institution. For many years, it was just a territory ruled by a king who was surrounded by a small elite group of warriors and court officials and it was basically rule by force over a larger mass of people.Slowly, however, the people gained political representation for none can really be said to be a member of the State without the right of having a voice in the direction o f policy making. One of the basic functions of the State in regards to administration is maintaining peace and internal order; it has no other excuse for interfering in the lives of its citizens. To maintain law and order the State develops means ofcommunication. Historically, the â€Å"king's highway† was laid down and maintained for the convenience of the royal armies not as an incentive to  commerce.In almost all countries, the State maintains the control of the means of communication and special freedoms such as those delineated in the  First Amendment to the United States Constitution  are rather limited. The State's original function of maintaining law and order within its borders gave rise to  police  administration which is a branch of the dispensation of  Justice  but on its preventive side, police jurisdiction has a special character of its own, which distinguishes it from ordinary judicial work.In thecurfew, the State shows early in history the import ance of preventing disorder. In early days, next to maintaining law and order, the State was concerned with the raising of  revenue. It was then useful to the State to establish a  standard  of  weights and measures  so that value could be generally accepted and finally the State acquired a  monopoly  of  coinage. The regulation of labor by the State as one of its functions dates from the 15th century, when  the Black Plague  killed around half of the European population. citation needed] The invariable policy of the State has always been to break down all intermediate authorities and to deal directly with the individual. This was the policy until  Adam Smith's  The Wealth of Nations  was published promoting a strong public reaction against State interference. By its own action, the State raised the issue of the poor or the State relief of the  indigent. The State, of course, did not create poverty but by destroying the chief agencies which dealt with t s uch as the village, the church and the  guilds, it practically assumed full responsibility for the poor without exercising any power over it. The Great Poor Law Report of 1834 showed that  communism  was widespread in the rural areas of England. In newly developed countries such as the  colonies  of the  British Empire, the State has refused to take responsibility for the poor and the relief of poverty, although the poor classes lean heavily towards State socialism. citation needed] Taking into account the arguably significant powers of the State, it is only natural that in times of great crisis such as an overwhelming calamity the people should invoke general State aid. [citation needed] Political representation has helped to shape State administration. When the voice of the individual can be heard, the danger of arbitrary interference by the State is greatly reduced. To that extent is the increase of State activity popular.There are no hard and fast rules to limit Stat e administration but it is a fallacy to believe that the State is the nation and what the State does is necessarily for the good of the nation. In the first place, even in modern times, the State and the nation are never identical. Even where â€Å"universal suffrage† prevails, the fact remains that an extension of State administration means an increased interference of some by others, limiting freedom of action. Even if it is admitted that State and nation are one and the same, it is sometimes difficult to admit that State administration is necessarily good.Finally, the modern indiscriminate advocacy of State administration conceals the fallacy that State officials must necessarily prove more effective in their action than  private enterprise. Herein lies the basic difference between  Public  and  Business Administration; the first deals with the  public weal  while the second deals basically in  profit  but both require a great deal of  education  and  ethical conduct  to avoid the mishaps inherent in the relationship not only relating to  business  and  labour  but also the State and the people administrating its  government. 13] [edit]The varieties of political experience The swearing of the oath of ratification of the treaty of Munster in 1648  (1648) by  Gerard ter Borch. According to Aristotle, States are classified into  monarchies,  aristocracies,  timocracies,  democracies,  oligarchies, and  tyrannies. Due to an increase in knowledge of the history of politics, this classification has been abandoned. Generally speaking, no form of government could be considered the absolute best, as it would have to be the perfect form under all circumstances, for all people and in all ways.As an institution created by the human nature togovern society, it is vulnerable to  abuse by people for their own gain, no matter what form of government a state utillises, thus posing that there is no ‘best' form of government. All States are varieties of a single type, the sovereign State. All the  Great Powers  of the modern world rule on the principle of  sovereignty. Sovereign power may be vested on an individual as in an  autocratic government  or it may be vested on a group as in a constitutional government.Constitutions  are written documents that specify and limit the powers of the different branches of government. Although a Constitution is a written document, there is also an unwritten Constitution. The unwritten constitution is continually being written by the Legislative branch of government; this is just one of those cases in which the nature of the circumstances determines the form of government that is most appropriate. Nevertheless, the written constitution is essential.England did set the fashion of written constitutions during the  Civil War  but after the  Restoration  abandoned them to be taken up later by the  American Colonies  after their  ema ncipation  and then  France  after the  Revolution  and the rest of Europe including the European colonies. [citation needed] There are two forms of government, one a strong central government as in France and the other a local government such as the ancient divisions in England that is comparatively weaker but less bureaucratic.These two forms helped to shape the  federal government, first in Switzerland, then in the United States in 1776, in Canada in 1867 and in Germany in 1870 and in the 20th century,  Australia. The Federal States introduced the new principle of agreement or  contract. Compared to a  federation, a  confederation's singular weakness is that it lacks  judicial power. [citation needed]  In the  American Civil War, the contention of the Confederate States that a State could  secede  from the Union was untenable because of the power enjoyed by the Federal government in the executive, legislative and judiciary branches. citation needed] According to professor  A. V. Dicey  in  An Introduction to the Study of the Law of the Constitution, the essential features of a federal constitution are: a) A written supreme constitution in order to prevent disputes between the jurisdictions of the Federal and State authorities; b) A distribution of power between the Federal and State governments and c) A Supreme Court vested with the power to interpret the Constitution and enforce the law of the land remaining independent of both the executive and legislative branches. 14] [edit]Political party Main article:  political party A  political party  is a  political organization  that typically seeks to attain and maintain political power within  government, usually by participating in  electoral campaigns, educational outreach or protest actions. Parties often espouse an expressed  ideology  or vision bolstered by a written  platform  with specific goals, forming a  coalition  among disparate interests . [citation needed] [edit]World politics The  United Nations  building in  New York CityThe 20th century witnessed the outcome of two world wars and not only the rise and fall of the  Third Reich  but also the rise and fall of  communism. The development of the  Atomic bomb  gave the United States a more rapid end to its conflict in Japan in  World War II. Later, the development of the  Hydrogen bombbecame the ultimate weapon of mass destruction. The  United Nations  has served as a forum for peace in a world threatened by nuclear war. â€Å"The invention of nuclear and space weapons has made war unacceptable as an instrument for achieving political ends. [15]  Although an all-out final nuclear holocaust is out of the question for man, â€Å"nuclear blackmail† comes into question not only on the issue of world peace but also on the issue of national sovereignty. [16]  On a Sunday in 1962, the world stood still at the brink of nuclear war during th e October  Cuban missile crisis  from the implementation of  U. S. vs  U. S. S. R. nuclear blackmail policy. ————————————————- [edit]As an academic disciplinePolitical science, the study of politics, examines the acquisition and application of  power. [17]  Political scientist  Harold Lasswell  defined politics as â€Å"who gets what, when, and how†. [18]  Related areas of study include  political philosophy, which seeks a rationale for politics and an ethic of public behaviour,  political economy, which attempts to develop understandings of the relationships between politics and the economy and the governance of the two, and  public administration, which examines the practices of governance. citation needed]  The philosopher  Charles Blattberg, who has defined politics as â€Å"responding to conflict with dialogue,† offers an acco unt which distinguishes political philosophies from political ideologies. [19] The first academic chair devoted to politics in the United States was the chair of history and political science at  Columbia University, first occupied by Prussian emigre  Francis Lieber  in 1857. [20] ————————————————- [edit]SpectraPolitical views differ on average across nations. A recreation of the Inglehart–Welzel Cultural Map of the World based on the  World Values Survey. Main article:  Political spectrum Several different  political spectrums  have been proposed. [edit]Left-right politics Main article:  Left–right politics Recently in history, political analysts and politicians divide politics into  left wing  and  right wing  politics, often also using the idea of center politics as a middle path of policy between the right and left.This classificat ion is comparatively recent (it was not used by  Aristotle  or  Hobbes, for instance), and dates from theFrench Revolution  era, when those members of the  National Assembly  who supported the  republic, the common people and a  secular society  sat on the left and supporters of the  monarchy,  aristocratic  privilege and the Church sat on the right. [21] The meanings behind the labels have become more complicated over the years. A particularly influential event was the publication of the  Communist Manifesto  by  Karl Marx  and  Frederick Engels  in 1848.The  Manifesto  suggested a course of action for a  proletarian  revolution to overthrow thebourgeois  society and abolish private property, in the belief that this would lead to a  classless  and  stateless  society. [citation needed] The meaning of left-wing and right-wing varies considerably between different countries and at different times, but generally speaking, it can be said that the right wing often values  tradition  and  social stratification  while the left wing often values  reform  and  egalitarianism, with the center seeking a balance between the two such as with  social democracy  or  regulated capitalism. 22] According to  Norberto Bobbio, one of the major exponents of this distinction, the Left believes in attempting to eradicate social inequality, while the Right regards most social inequality as the result of ineradicable natural inequalities, and sees attempts to enforce social equality as utopian or authoritarian. [23] Some ideologies, notably  Christian Democracy, claim to combine left and right wing politics; according to Geoffrey K.Roberts and Patricia Hogwood, â€Å"In terms of ideology, Christian Democracy has incorporated many of the views held by liberals, conservatives and socialists within a wider framework of moral and Christian principles. â€Å"[24]  Movements which claim or formerly claimed to be above the left-right divide include  Fascist  Terza Posizioneeconomic politics in Italy,  Gaullism  in France,  Peronism  in Argentina, and  National Action Politics  in Mexico. [citation needed] [edit]Authoritarian-libertarian politics Authoritarianism  and  libertarianism  refer to the amount of individual  freedom  each person possesses in that society relative to the state.One author describes authoritarian political systems as those where â€Å"individual  rights  and goals are subjugated to group goals, expectations and conformities†,[25]  while libertarians generally oppose the  state  and hold theindividual  as  sovereign. In their purest form, libertarians are  anarchists, who argue for the total abolition of the state, of  Political parties  and of  other political entities, while the purest authoritarians are, theoretically,  totalitarians  who support state control over all aspects of  society. citation nee ded] For instance,  classical liberalism  (also known as  laissez-faire  liberalism,[26]  or, in much of the world, simply  liberalism) is a doctrine stressing individual freedom and  limited government. This includes the importance of human rationality, individual  property rights,  free markets,  natural rights, the protection of  civil liberties, constitutional limitation of government, and individual freedom from restraint as exemplified in the writings of  John Locke,  Adam Smith,  David Hume,  David Ricardo,  Voltaire,  Montesquieu  and others.According to the libertarian  Institute for Humane Studies, â€Å"the libertarian, or ‘classical liberal,' perspective is that individual well-being, prosperity, and social harmony are fostered by ‘as much liberty as possible' and ‘as little government as necessary. ‘†[27]  For anarchist political philosopher  L. Susan Brown  Ã¢â‚¬Å"Liberalism and  anarchism   are two political philosophies that are fundamentally concerned with individual  freedom  yet differ from one another in very distinct ways. Anarchism shares with liberalism a radical commitment to individual freedom while rejecting liberalism's competitive property relations. [28] ————————————————- [edit]Political corruption Main article:  Political corruption â€Å"| Unlimited power is apt to corrupt the minds of those who possess it. | †|   | —  William Pitt the Elder[29]| | Political corruption  is the use of legislated powers by government officials for illegitimate private gain. Misuse of government power for other purposes, such as  repression  of political opponents and general police brutality, is not considered political corruption.Neither are illegal acts by private persons or corporations not directly involved with the government. An illegal act by an officeholder constitutes political corruption only if the act is directly related to their official duties. [citation needed] Forms of corruption vary, but include  bribery,  extortion,  cronyism,  nepotism,  patronage,  graft, and  embezzlement. While corruption may facilitate  criminal enterprise  such as  drug trafficking,  money laundering, and  trafficking, it is not restricted to these activities. citation needed]  The activities that constitute illegal corruption differ depending on the country or jurisdiction. For instance, certain political funding practices that are legal in one place may be illegal in another. In some cases, government officials have broad or poorly defined powers, which make it difficult to distinguish between legal and illegal actions. [citation needed] Worldwide, bribery alone is estimated to involve over 1 trillion US dollars annually. [30]  A state of unrestrained

Externalities, Pollution and Global Warming

Topic 4: Externalities, Pollution and Global Warming ECON 1210B Economics and Society 1 Introduction Recall: Markets are usually a good way to organize economic activity In the absence of market failures, the market outcome is efficient, maximizes total surplus One major type of market failure: externalities Externality: the uncompensated impact of one person’s actions on the well-being of a bystander 2 Externalities and EfficiencyIn the presence of externality, market equilibrium is no longer efficient Individual’s estimates of resources value (or cost) are not correct (from the society’s point of view) Traditional belief: Government to step in to ensure efficient resource allocation And to protect the interest of bystanders as well 3 Negative Externality Negative Externality: the effect on bystanders is adverse Example: the neighbor’s barking dog talking on cell phone while driving makes the roads less safe for others health risk to others from second-ha nd smoke noise pollution from construction projects 4 Pollution: A Negative ExternalityFirms burn huge quantities of fossil fuels (coal, natural gas, oil) that cause acid rain and global warming Firms dump toxic waste into rivers, lakes, and oceans These environmental issues are simultaneously everybody’s problem and nobody’s problem 5 Pollution: A Negative Externality Example of negative externality: Air pollution from factory Firm does not bear the full cost of its production, so will produce more than the socially efficient quantity How govt may improve the market outcome: Impose a corrective tax on the firm equal to the external cost of the pollution it generates 6 Recap of Welfare EconomicsP $5 4 3 $2. 50 2 1 0 The market for gasoline The market eqm maximizes consumer + producer surplus. Supply curve shows private cost, the costs directly incurred by sellers Demand curve shows private value, the value to buyers (the prices they are willing to pay) 0 10 20 25 30 Q (gallons) 7 Analysis of a Negative Externality Key: distinguish private and social costs Private costs and social costs diverge in the presence of externality Producer concerns private cost, which neglect the external cost (pollution cost) Social cost represents the resource cost to a society social cost = private cost + external cost 8Analysis of a Negative Externality P $5 4 3 2 1 0 The market for gasoline Social cost =private+ external cost external cost 0 External cost = value of the negative impact on bystanders = $1 per gallon (value of harm Supply (private cost) from smog, greenhouse gases) 10 20 30 Q (gallons) 9 Analysis of a Negative Externality P $5 4 3 2 D 1 0 The market for gasoline Social cost S The socially The socially optimal quantity optimal quantity is 20 gallons. is 20 gallons.At any Q < 20, At any Q < 20, value of additional gas value of additional gas exceeds social cost exceeds social cost At any Q > 20, At any Q > 20, social cost of the social cost of the last gallon is last gallon is greater than its value greater than its value 10 0 10 20 25 30 Q (gallons) Analysis of a Negative Externality P $5 4 3 2 D 1 0 The market for gasoline Mkt eqm (Q = 25) Social cost is greater than social optimum S (Q = 20) overproduction resulted in DWL (red triangle) One solution: impose a corrective tax of $1/gallon on sellers, shift supply curve up $1 11 0 10 20 25 30 Q (gallons) Internalizing the ExternalityInternalizing the externality: altering incentives so that people take account of the external effects of their actions previous example: $1/gallon tax on sellers makes sellers’ costs equal to social costs When market participants must pay social costs, the market eqm matches the social optimum. Imposing the tax on buyers would achieve the same outcome: market Q will equal optimal Q 12 Summary For Pollution: A Negative Externality With negative externality, QMarket >QSocial Optium firms over-produce (DWL exist) Remedy: The government can intern alize the externality by imposing corrective tax Price tax S’ SQ = Qmarket = initial eqm Q’ = QSocial Optium = eqm after tax D Q’ Q Quantity 13 Externality in Consumption Consumption of alcohol, tobacco, and gasoline (private driving) all create negative externality to the society Got impose a heavy corrective tax on these goods to alter the incentives of customers, in order to mitigate of negative externality 14 Corrective Tax Rate (Levy / Charges) in HK Alcohol: 100% tax rate for alcohol with strength of more than 30% by volume Cigarettes: $1. 7 / each cigarette, tax for a pack of 20-stick cigarettes = $34 70% of the selling price of $50 / pack Leaded petrol: $6. 823/ litre, unleaded petrol: $6. 6/ litre About 40% of the selling price of each litre of gasoline 15 Example: Gasoline Tax Targets 3 Negative Externalities Congestion: the more you drive, the more you contribute to congestion Accidents: larger vehicles cause more damage in an accident Pollution: burn ing fossil fuels produces greenhouse gases 16 Case Study: Environmental Levy on Plastic Shopping Bags in HK Survey indicates that some 8 billion (8,000,000,000) plastic shopping bags are disposed of at landfills every year in HK This translates into more than 3 plastic shopping bags per person per day, which apparently go beyond our needs 7 Case Study: Environmental Levy on Plastic Shopping Bags in HK Address the problem of abuse, gov introduced an levy of $0. 5 HKD on each plastic shopping bag at the retail level Estimated negative externality of each plastic bag = ? 18 Positive Externality Positive Externality: the effect on bystanders is beneficial Example: When you get a flu vaccination, everyone you come into contact with benefits Research and Development (R&D) creates knowledge others can use Renovating your house increases neighboring property values Restores of historical building 19 Positive Externalities from EducationA more educated population benefits society: lower crim e rates: educated people have more opportunities, so less likely to rob and steal better government: educated people make better-informed voters People do not consider these external benefits when deciding how much education to â€Å"purchase† 20 Positive Externalities from Education Result: market eqm Q of education too low How govt may improve the market outcome: subsidize cost of education In the presence of a positive externality, the social value of a good includes private value: the direct value to buyers external benefit: the value of the positive impact on bystanders 21Analysis of a positive externality P The market for flu shots $50 40 30 20 10 0 0 10 20 30 S D External benefit = $10/shot Draw the social value curve. Find the socially optimal Q. What policy would internalize this externality? Q 22 Analysis of a positive externality P The market for flu shots $50 40 30 20 10 0 0 10 20 25 30 external benefit S Mkt eqm Q = 20 Social optimal Q = 25 underproduction result ed in DWL (red triangle) Social value = private value + external benefit D To internalize the externality, use Q subsidy = $10/shot. 23Case Study: Innovation and Technology Policy in HK Should government subsidize high tech companies? Pros: Spillover effects International competitiveness Cons: Potential misallocation of public resource Potential problems of unfairness & corruption 24 Case Study: Innovation and Technology Policy in HK Eg: Cyberport IT project? 25 Summary: Corrective Tax and Subsidy to Deal With Externalities If negative externality market produces a larger quantity than is socially desirable If positive externality market produces a smaller quantity than is socially desirable 6 Summary: Corrective Tax and Subsidy to Deal With Externalities remedy the problem: â€Å"internalize the externality† tax goods with negative externalities ideal corrective tax = external cost subsidize goods with positive externalities ideal corrective subsidy = external benefit 27 Pri vate Solutions to Externalities? Government intervention is always controversial Major concerns of government intervention include fairness and efficiency The market does develop some possible solutions to externality over time 28 Private Solutions to Externalities?Social norms / moral codes Eg: littering Mergers Eg: MTR as a property developer Contracts between market participants and the affected bystanders However: If an externality affects many people, contract negotiation is virtually impossible 29 Public Policies Toward Negative Externalities Market-based policies provide incentives so that private decisionmakers will choose to solve the problem on their own Corrective Tax Tradable Pollution Permits 30 Public Policies Toward Negative Externalities Command-and-control policies: Regulation regulate behavior directly.Examples: limits on quantity of pollution emitted requirements that firms adopt a particular technology to reduce emissions 31 Policy Option: Example â€Å"Ace Elec tric† and â€Å"Billy Power† both are running coal-burning power plants Each emits 40 tons of sulfur dioxide per month SO2 causes acid rain & other health issues Policy goal: reducing SO2 emissions 25% to 60 tons/month 32 Policy Option: Regulation Vs Corrective Tax Policy options 1. regulation: require each plant to cut emissions by 25% 2. corrective tax: make each plant pay a tax on each ton of SO2 emissions. Set tax at level that achieves goal. 33Policy Option: Regulation Vs Corrective Tax Under Policy option 1, regulation, firms have no incentive to reduce emissions beyond the 25% target Suppose cost of reducing emissions is lower for â€Å"Ace Electric† than for â€Å"Billy Power† Socially efficient outcome: â€Å"Ace Electric† reduces emissions more than â€Å"Billy Power† 34 Policy Option: Regulation Vs Corrective Tax Corrective tax is a price on the right to pollute Under policy option 2, tax on emissions gives firms incentive to conti nue reducing emissions as long as cost of doing so is less than the tax If a cleaner technology available, tax gives firms incentive to adopt it Tax payment is money!So, corrective taxes enhance efficiency by aligning private with social incentives 35 Policy Option: Tradable Pollution Permits Recall: â€Å"Ace Electric† and â€Å"Billy Power† each emit 40 tons SO2, total of 80 tons. Goal: reduce 25% emissions to 60 tons/month Policy option 3: Tradable Pollution Permits issue 60 permits, each allows its holder to emit one ton of SO2 give 30 permits to each firm establish market for trading permits 36 Policy Option: Tradable Pollution PermitsEach firm can choose among these options: emit 30 tons of SO2, using all its permits emit < 30 tons, sell unused permits buy additional permits so it can emit > 30 tons 37 Policy Option: Tradable Pollution Permits A system of tradable pollution permits achieves goal at lower cost than regulation Firms with low cost of reducing pollut ion (Ace Electric) sell whatever permits they can Firms with high cost of reducing pollution (Billy Power) buy permits Result: incentive to reduce pollution: permit = money 38Tradable Pollution Permits in the Real World Emission of greenhouse gases causes the global warming The primary greenhouse gas in the atmosphere is the emission of carbon dioxide Carbon emissions trading is a form of emissions trading that specifically targets carbon dioxide 39 Tradable Pollution Permits in the Real World Carbon emissions permits traded in Europe since January 1, 2005 Recall: permit = money Firms will have strong incentive to reduce carbon emissions 40

Factor Affecting People Investing in Mutual Fund

Factors affecting people investing in Mutual Fund in Malaysia: An application of the Theory of Planned Behavior Kuah Kean Lam Research report in partial fulfillment of the requirements for the degree of MBA 2008 ACKNOWLEDGEMENTS I would like to thank my supervisor, Dr. Nabsiah Abd. Wahid and my co-supervisor, Dr. Datin Joriah for their invaluable guidance in helping me with this research. Special thanks also go to Associate Professor T. Ramayah for his kind assistance and consultants in my statistical analysis. My sincere thanks to all the lecturers in the MBA programs.I also want to thank my family for their patience, support and encouragement during the period of my study. I am also grateful to my friends for their help and encouragement. Lastly, I wish to accord my appreciation to all the respondents who had so kind to respond my questionnaire in time. i TABLE OF CONTENTS Page ACKNOWLEDGEMENT i TABLE OF CONTENTS ii LIST OF TABLES vii LIST OF FIGURES viii LIST OF APPENDICES ix ABST RAK xi ABSTRACT xii Chapter 1 INTRODUCTION 1 1. 1 Introduction 1 1. 2 Background 1 1. 2. 1 Benefits of Unit Trust Scheme 2 1. 2. 2 Disadvantages of Unit Trust Scheme 1. 2. 3 Types of Unit Trust Funds 4 1. 2. 4 Growth of Mutual Fund in Malaysia 6 1. 3 Problem Statement 8 1. 4 Research Objectives 10 1. 5 Research Question 10 1. 6 Definition of Key Terms 11 ii 1. 6. 1 Mutual Fund / Unit Trust Fund 1. 6. 2 11 Federation of Malaysia Unit Trust Managers (FMUTM) 12 1. 6. 3 Net Asset Value (NAV) 12 1. 6. 4 Islamic Mutual Fund 12 1. 6. 5 Attitude 13 1. 6. 6 Subjective Norms 13 1. 6. 7 Perceived Behavioral Control 14 1. 6. 8 Behavioral Intention 14 1. 7 14 1. 8 Chapter 2 Significance of Study Organization of Remaining Chapter 15 LITERATURE REVIEW 16 2. Introduction 16 2. 2 Literature Review 16 2. 2. 1 Emerging Market Research 17 2. 2. 2 International Research 20 2. 3 Model Explanation (TRA, TAM, TPB, and DTPB) 22 2. 3. 1 Theory of Reasoned Action (TRA) 23 2. 3. 2 Technology Acceptance Model ( TAM) 25 2. 3. 3 Theory of Planned Behavior (TPB) 26 2. 3. 4 Decomposed Theory of Planned Behavior (DTPB) 28 2. 3. 5 Inclusion of other variables in the TPB iii 31 2. 4 33 2. 5 Theoretical Framework 33 2. 6 Chapter 3 Gaps in Literature Hypothesis Development 35 METHODOLOGY 41 3. 1 Introduction 41 3. 2 Research Design 41 3. 2. 1 Type of Study 1 3. 2. 2 Data Collection Method 42 3. 2. 3 Population and Sample 42 3. 2. 4 Data Collection 43 3. 3 Data Analysis 43 3. 3. 1 Descriptive Analysis 45 3. 3. 2 Factor Analysis 45 3. 3. 3 Reliability Test 45 3. 3. 4 Correlation Analysis 46 3. 3. 5 Multiple Regression Analysis 46 3. 4 48 3. 5 Chapter 4 Summary Expected Outcome 48 RESULTS 50 4. 1 Introduction 50 4. 2 Profile of Respondents 50 4. 3 Goodness of Measures 52 iv 4. 3. 1 Factor Analysis 52 4. 3. 1. 1 Factor Analysis for Relative Advantage, Compatibility and Ease of Invest 53 4. 3. 1. 2 Factor Analysis for Efficacy andFacilitating Condition 54 4. 3. 1. 3 Factor Analysis for Past Behavior, At titude, SN and PBC 4. 3. 2 4. 4 Reliability Test 57 Descriptive Analysis 4. 4. 1 55 58 Analysis of Independent Variable Explanatory Role 58 4. 5 Correlation Analysis 60 4. 6 Hypotheses Testing 62 4. 6. 1 Multiple Regression Analysis (Stage 1a) 62 4. 6. 2 Multiple Regression Analysis (Stage 1b) 64 4. 6. 3 Multiple Regression Analysis (Stage 1c) 66 4. 6. 4 Multiple Regression Analysis (Stage 2) 68 4. 6. 5 Multiple Regression Analysis (Stage 3) 70 4. 7 Chapter 5 Summary of Results 73 DISCUSSION AND CONCLUSION 76 . 1 Introduction 76 5. 2 Recapitulation of the Study Findings 76 5. 3 Discussion of Major Findings 77 v 5. 3. 1 Attitude towards the Behavioral 78 5. 3. 2 Past Behavior 79 5. 3. 3 Subjective Norms 80 5. 3. 4 Perceived Behavioral Control 80 5. 3. 5 Behavioral Intention 81 5. 3. 6 Actual Investment 82 5. 3. 7 Relative Advantage, Compatibility and Ease of Invest 5. 3. 8 Efficacy and Facilitating Condition 83 5. 3. 9 5. 4 82 Normative Influence 84 Implications 84 5. 4. 1 Theoretica l Implication 84 5. 4. 2 Practical Implication 85 5. 4. 2. 1 Marketing Strategy for Mutual Fund 85 5. 5Answering the Research Questions 87 5. 6 Limitations 89 5. 7 Future Research 90 5. 8 Conclusion 90 REFERENCES 91 APPENDICES 97 vi LIST OF TABLES Page Table 4. 1 Respondents Demographic Profile Table 4. 2 Rotated Component Matrix for relative advantage, Compatibility and ease of invest Table 4. 3 54 Rotated Component Matrix for efficacy and facilitating Condition Table 4. 4 51 55 Rotated Component Matrix for Attitude, SN, PBC and Past Behavior 56 Table 4. 5 Reliability Coefficients of Variables 57 Table 4. 6 Descriptive Statistics 59 Table 4. 7 Pearson’s Correlation Analysis of Variable 1 Table 4. 8 Result of Multiple Regression of H8, H9 and H10 63 Table 4. 9 Result of Multiple Regression of H13 65 Table 4. 10 Result of Multiple Regression of H11 and H12 67 Table 4. 11 Result of Multiple Regression of H1, H2, H3 and H5 69 Table 4. 12 Result of Multiple Regression of H4, H6 a nd H7 72 Table 4. 13 Summary of Hypotheses Testing Results 73 vii LIST OF FIGURES Page Figure 1. 1 Total NAV vs Bursa Malaysia Market Capitalization as at 31st Dec 2006 6 Figure 2. 1 Theory of Reasoned Action 24 Figure 2. 2 Technology Acceptance Model 25 Figure 2. 3 Theory of Planned Behavior 26Figure 2. 4 TPB with belief de-composition 29 Figure 2. 5 Theoretical Framework 35 Figure 4. 1 Stage 1a Multiple Regression 62 Figure 4. 2 Stage 1b Multiple Regression 64 Figure 4. 3 Stage 1c Multiple Regression 66 Figure 4. 4 Stage 2 Multiple Regression 68 Figure 4. 5 Stage 3 Multiple Regression 71 Figure 4. 6 Model Summaries with Significant Relationship and Beta Value 75 viii LIST OF APPENDICES Page Appendix A Questionnaire 97 Appendix B Coding of Variables 103 Appendix C Respondent Frequency Results 104 Appendix D Factor Analysis – Relative Advantage, Compatibility and Ease of Invest 08 Appendix D1 Factor Analysis – Relative Advantage, Compatibility and Ease of Invest. (Afte r removal of RA_2) Appendix E 111 Factor Analysis – Efficacy and Facilitating Condition 114 Appendix E1 Factor Analysis – Efficacy and Facilitating Condition (After removal of FC_2) 117 Appendix E2 Factor Analysis – Efficacy and Facilitating Condition (After removal of FC_2 and EF_2) Appendix F 120 Factor Analysis – Past Behavior, Attitude, Subjective Norm And PBC 123 Appendix F1 Factor Analysis – Past Behavior, Attitude, Subjective Norm And PBC (After removal of Att_3) 128 Appendix GReliability Analysis – Behavioral Intention 133 Appendix H Reliability Analysis – Actual Investment 134 Appendix I Reliability Analysis – Attitude 135 Appendix J Reliability Analysis – Subjective Norm 136 Appendix K Reliability Analysis – PBC 137 Appendix L Reliability Analysis – Relative Advantage 138 ix Appendix M Reliability Analysis – Ease of Invest 139 Appendix N Reliability Analysis – Normative Influence 140 Appendix O Reliability Analysis – Efficacy 141 Appendix P Reliability Analysis – Facilitating Condition 142 Appendix Q Descriptive Analysis Results 143 Appendix R Correlation Analysis Results 44 Appendix S Stage 1a Multiple Regression Analysis 145 Appendix T Stage 1b Multiple Regression Analysis 148 Appendix U Stage 1c Multiple Regression Analysis 151 Appendix V Stage 2 Multiple Regression Analysis 154 Appendix W Stage 3 Multiple Regression Analysis 157 x ABSTRAK (MALAY) Faktor-faktor yang mempengaruhi pelaburan dalam dana bersama di Malaysia: Applikasi dengan Teori Perlakuan Terancang. Dana Bersama (Mutual Fund) di Malaysia mengalami perkembangan pesat dalam beberapa tahun yang lepas. Perkembangan pesat ini menandakan kesesuaian pelaburan secara berkumpul di Malaysia.Hari ini, dana bersama telah menjadi satu bahagian penting dalam bidang ekonomi Malaysia. Perkembangan sihat dalam bidang tersebut telah memberi manfaat kepada ekonomi negara dan para pelabur. Tujuan kaj ian ini adalah untuk menentukan faktorfaktor yang mempengaruhi orang ramai untuk melabur dalam dana bersama di Malaysia dengan menggunakan Teori Perlakuan Terancang (TPB) yang diubahsuai. Sebanyak 400 soal selidik telah diedarkan kepada orang dewasa di negeri Pulau Pinang dan 211 soal selidik yang boleh diguna telah dikutip balik. Berdasarkan analisis, didapati model yang diguna dapat menerangkan 47. % varian dalam Keinginan (Intention). Sikap (Attitude), Perlakuan Lepas (Past Behavior) and Norma Subjektif (Subjective Norms) mempunyai hubungan positif yang ketara dengan keinginan untuk melabur dalam dana bersama. Analisis seterusnya mendapati kedua-dua kelakuan lepas dan keinginan mempunyai hubungan kesan positif yang ketara dengan pelaburan sebenar. Sungguhpun model ini dapat menerangkan varian agak tinggi dalam keinginan, tetapi didapati Tanggapan Kawalan Perlakuan (Perceived Behavioral Control) tidak mempunyai hubungan kesan positif yang ketara dengan keinginan dan pelaburan sebe nar.Keputusan ini mencadangkan model teoretikal lain tanpa pembolehubah (variable) ini mungkin akan lebih sesuai untuk mengkaji sikap pelaburan dana bersama. xi ABSTRACT Mutual Funds in Malaysia have experienced phenomenal growth in the past few years. This growth reflects the suitability of collective investments in Malaysia. Mutual fund forms an important part of the Malaysian economy today. The healthy growth of the industry seems to benefit the country’s economy and the investors.The aim of this study is to determine the factors affecting people investing in Mutual Fund in Malaysia using the modified decomposed Theory of Planned Behavior. Structured questionnaire was used in this study. Four hundred questionnaires were distributed to the adults in Penang state and two hundred eleven useable questionnaires have been collected back. Based on the analysis, it was found that the model has explained 47. 4% of the variance in Behavioral Intention. Attitude towards behavior, Pas t Behavior and Subjective Norm have positive significant influence on investors’ Intention to invest in mutual fund.Further analysis on the Actual Investment, it was found that the both Past Behavior and Intention have positive significant influence on investors’ actual investment behavior. Even though the model has explained considerable high percentage of variances in Behavioral Intention, however, the findings that Perceived Behavioral Control is not a significant contributor to both Behavioral Intention and Actual Investment suggests that other theoretical model without this variable might be more suitable to study mutual fund investment behavior. ii Chapter 1 INTRODUCTION 1. 1 Introduction This chapter introduces the research outline of the study. The chapter begins with an overview of the Mutual Fund industry in Malaysia, followed by brief discussion of the benefits and disadvantages of the Unit Trust Scheme, their growth and different types of Mutual Funds. Besi des that, this chapter also includes the problem statement, research objectives and research questions. The key terms and significance of the study will also be highlighted. 1. 2 BackgroundA Unit Trust Scheme (UTS) or Mutual Fund (MF) is a form of collective investment that allow investors with similar investment objectives to pool their savings, which are then invested in a portfolio of securities or other assets managed by investment professionals. Investors in Unit Trust Scheme or Mutual Fund do not purchase the securities in the portfolio directly. Securities or stocks are purchased by the Unit Trust Management Company (UTMC) following the authorized investments guidelines by a group of professional fund managers.Ownership of the portfolio is divided into units of entitlement and each investor is known as a ‘unit holder’. In this case, unit holders in Unit Trust Scheme (UTS) are not shareholders in the company but are rather beneficiaries under a trust set up by the company. Under the Unit Trust Scheme constitution or ‘deed’, there must be a trustee looking after the interest of the investors. The trustee is the legal owner of all the assets of UTS on behalf of the unit holders, and must act for the benefit of the unit holders. Unit holders in UTS have a eneficial interest in all the assets of those UTS, but are not entitle to direct UTMC on how to invest the portfolio of investments (Dealing in Unit Trust, FMUTM 2005). The return on investment for unit holders in UTS is usually a combination of a regular income payment (a ‘distribution’) and capital appreciation derived from the pool of investments held within those UTS. Each unit represents an entitlement to an equal amount of income and capital appreciation or depreciation that is normally reflected in the unit price of those UTS (Dealing in Unit Trust, FMUTM 2005). 1. 2. Benefits of Unit Trust Scheme For investor who is unable or unwilling to research and analyze investment markets by their own effort, Unit Trust Scheme is an ideal way of investing. To maintain a portfolio of directly held investments, an individual needs to keep up-to-date with market information and sentiment. This means keeping track of a wide range of information from many sources. For many individual investors, this is difficult, time consuming and expensive. Investing in UTS transfers most of the stress of investing to those best equipped to handle it – professional fund managers.Other significant benefits of investing in UTS are listed as below: (i) Diversification A larger pool of funds from many small investors allows the fund manager to purchase a wide range of investments. (ii) Liquidity of funds Most investors require that their investment be liquid. The investor can redeem their unit trust fund and receive their money in the specified time frame. In the case of Malaysia, the guideline is within 10 days. 2 (iii) Professional Management Investment decisions are made by professional fund managers.The investment process adopted is structured and follows basic investment principles outlined in the prospectus and deed. (iv) Investment Exposure For small investor (with RM1000), it is sometimes difficult to invest in particular asset class or certain securities, for example real estate or corporate bonds. UTS make this possible with pool investments from many small investors. (v) Investment Cost When making direct investments, the smaller investors will pay higher transaction cost if compare to large institutional investors due to prenegotiated fees on large purchase. 1. 2. Disadvantages of Unit Trust Scheme Some of the disadvantages of Unit Trust Scheme are list as follows: (i) Risk Any investment involves risk. Investment in UTS also has its risk of losing all of the money invested. (ii) Loss of Control Investors in UTS lose their right to direct how their savings are invested. If the fund manager invests the portfolio in accordance with the prospectus and deed, there is little that the unit holders can do if they disagree with the investment decisions made by the fund manager. 3 (iii) Fees and Charges The services provided by the UTMC are not without cost.Hence there are fees and charges payable by investors in UTS. (iv) Opportunity cost As with any decision, an investor who invests in UTS may have produced better returns by investing directly in the markets. This excess represents the ‘opportunity cost’ of investing in UTS. 1. 2. 3 Types of Unit Trust Funds Mutual funds are referred to as open-end funds for two main reasons: (i) they are required to redeem (or buy back) outstanding shares at any time upon a shareholder’s request, at a price based on the current value of the fund’s net assets; and (ii) irtually all mutual funds continuously offer new fund shares to the public. A closed-end fund is an investment company that issues a fixed number of shares that trade on a stock exchange or in the over-the-counter market. Assets of a closed-end fund are professionally managed in accordance with the fund’s investment objectives and policies, and may be invested in stocks, bonds, or a combination of both. Like other publicly traded securities, the market price of closed-end fund shares fluctuates and is determined by supply and demand in the marketplace. 4Based on Lipper’s fund investment objectives, Unit Trust Funds in Malaysia have been grouped into the following seven types (FMUTM Annual Report, 2006): (a) Exchange Traded Funds-Bond General funds. (b) Guaranteed/ Protected funds : Comprises Capital Guaranteed funds and Capital Protected funds. (c) Money Market funds : Include all Money Market funds. (d) Mixed Asset funds : Include Mixed Asset Asia, Mixed Asset Emerging Markets Asia, Mixed Asset Global, Mixed Asset Growth funds and Mixed Asset Income funds. (e) Islamic funds : Bond Islamic/Syariah funds, Equity Islamic/Syariah funds and Mixed Asset Islam ic/Syariah Balanced funds. f) Bond funds : Include all General Bond funds. (g) Equity funds : Include Equity ASEAN fund, Equity Asia Pacific Ex-Japan funds, Equity, Equity Europe, Global funds, Equity Growth funds, Equity Income funds, Equity Index Tracking funds, Equity Info & Technology funds, Equity Sector Real Estate Asia funds, Equity Sector Real Estate Global funds and Equity Small Companies funds. 1. 2. 4 Growth of Mutual Fund in Malaysia In Malaysia and throughout the world, Mutual Trust funds have experienced phenomenal growth in the past few years.This growth reflects the suitability of collective investments in Malaysia, as a means for the smaller investor to accumulate capital over the longer term. 5 Figure 1. 1 shows the growth trend of mutual fund and total NAV versus Bursa Malaysia Market capitalization. Figure 1. 1. Total NAV vs Bursa Malaysia Market Capitalization as at 31st Dec 2006 Source: Securities Commission (2007) Although the mutual fund industry in Malaysia started as far back as 1959 with the establishment of the Malayan Unit Trust Ltd, the development of the industry did not take-off until 1980s with the launching of the Amanah Saham Nasional (ASN). The major growth of the industry can only be seen in the 1990s when Malaysia, together with other Asian Tigers, saw a high and consistent growth in their economies. For Malaysia, the growth in the mid-1990s was very much due to the boost given by the government in the area of tax relief and allowing withdrawal on Employee Provident Fund (EPF) to invest in the mutual fund. With these incentives the mutual fund industry increased in size from RM15. 7 billion in 1992 to RM60 billion in 1996. The Asian crisis of 1997 had brought a sudden halt to this and we have seen even negative growth. However, the signs of recovery after that are becoming evident.Growth of the unit trust industry in Malaysia continued at a rapid pace in 2006. Total Net Asset Value (NAV) of the industry gained 23. 6 per ce nt, the net asset value of the managed funds increased to RM121. 8 billion. This amounts made-up of only 14. 35 per cent of the total market capitalization of the Bursa Malaysia, which stood at RM848. 7 billion. (FMUTM Annual Report, 2006) Different from the developed countries, an important characteristic of the Malaysian mutual fund industry is the dominant role of the government. As of 2006, more than 58% of these funds are affiliated with the government, i. . either owned by state governments or quasi-government agencies. Nevertheless, the number of private sector funds is increasing, in particular bank-owned funds. The NAV of the private unit trust funds (excluding federal and some state funds) in year 2006 stood at RM50. 7 billion, an increase of RM 6. 6 billion over previous year. (FMUTM Annual Report, 2006) The double digit growth was observed. The type of funds included Equity Funds, Bond Funds, Islamic Funds, Mixed Asset Funds, Money Market Funds, Guaranteed Funds and Exch ange Traded Funds. All these funds are the â€Å"open-end† Mutual Funds. 7Unit Trust industries are well established in developed financial markets like United States and European Union. The extent to which research, both at the theoretical and technical level, has been conducted in developed markets indicates the stage of maturity of mutual funds in these markets. In emerging markets, however, mutual funds are a recent phenomenon. Nevertheless, growth has been robust. Emerging Asian economies like China, Indonesia, the Philippines, India and Malaysia are expected to grow by double digits annually and projected to reach US$ 12 trillion by the year 2030 (PR Newswire, 2000).The phenomenon growth in the mutual fund industry in these emerging markets has resulted in an increase in the number of investment companies offering a wide range of different mutual funds (Ramasamy & Yueng, 2003). Faced with a wide range of mutual funds, how does one made choices and what are the factors a ffecting the intention of an investor investing in Mutual Funds? 1. 3 Problem Statement Growth, both in terms of size and number of funds categories, in the mutual fund industry among emerging markets has been impressive.Most researches, be it domestic or international, were on the mutual funds performance compared to the market (Don, Galagedera & Silvapulle, 2002), comparison of funds performance in different regions (Otten 2002), Islamic Funds performance (Abdullah, Hassan & Mohamad, 2007), aggregate funds performance (Taib & Isa, 2007), qualification, experience and investment style of fund manager, asset size and transaction cost (Ramasamy & Yeung, 2003), price linkage with index in emerging market (Low & Ghazali, 2007) and performance of funds during different economic cycles (Low, 2007).All the researches are conducted on the nature and 8 characteristics of the mutual funds it selves and not for one of the most important components of the mutual funds, the â€Å"investorsâ₠¬  or â€Å"mutual fund purchasers†. Thus, in this research, we will study the individual investors’ intention and factors affecting investment decision in the emerging market like Malaysia. This paper intends to fill this gap. Mutual fund forms an important part of the Malaysian economy today. As of 31st December 2006, the total registered mutual trust agent was 31060 people (FMUTM annual report, 2006).Many peoples’ livelihoods are depending on this industry, directly or indirectly. Besides the mutual trust agents, the mutual trust management companies, and regulatory bodies in Mutual Fund industry, investors play the utmost important role in the growth of the industry as they are the one who provides the required capital in the industries. Investors have numerous choices to invest their savings; there are many benefits and disadvantages to invest in the mutual trust funds. Investors have to weight the benefits and disadvantages, and to consider their investme nt objectives before deciding to invest in the Mutual Funds.In many developed countries, Mutual Funds investment has become the preferred vehicle for savings and retirement. The healthy growth of the industry seems to benefits the country’s economy and the investors. For the continuous growth of the industries in Malaysia, it is utmost important to study the behaviors of the investors, their intention, and the other factors motivating investors investing in Mutual Fund. Many theories have been developed and evolved through time for the research of behaviors and intentions in many domains. Among the few popular theories re Theory of Reasoned Action (TRA), Theory of Planned Behavior (TPB) and Technology Acceptance 9 Model (TAM). The theoretical models and their comparison will be discussed in detail in section 2. 3. 1. 4 Research Objectives We have seen that NAV of Mutual Funds invested in Malaysia on 2006 was at RM 121. 8 billion. This has formed an important part of the Malay sian economy. This study is to investigate factors influencing Malaysian consumers’ intentional behavior to invest in Mutual Funds using modified Decomposed Theory of Planned Behavior (DTPB).In line with this, four specific objectives have been developed. The four main objectives of this study are therefore to: (1) determine significant contributing factors to Attitude, Subjective Norm and Perceived Behavioral Control, (2) determine the most significant factors among Attitude, Subjective Norm and Perceived Behavioral Control that lead to Behavioral Intention to invest in Mutual Fund, (3) identify the relationship of Intention and Actual Investment (Behavior). (4) In line with the 3 objective above, an additional objective will be drawing the implications for the marketing of Mutual Fund products. . 5 Research Question This research attempts to answer the following research question: (1) What are the factors that significantly affect Attitude, Subjective Norm and Perceived Beh avioral Control? 10 (2) Attitude, Subjective Norm, Perceived Behavioral Control and Past Behavior – which of these factors significantly contribute to Intention to invest in Mutual Funds? (3) Will Intention turn into actual Investment in Mutual Funds? (4) What are the conclusions and implications of the study for the marketing of Mutual Fund products? 1. 6 Definition of Key TermsIn order to share common understanding of the concepts and for better understanding of further discussion, the following key terms’ definition were referred specifically. 1. 6. 1 Mutual Fund / Unit Trust Fund Mutual Fund is a form of collective investment that allow investors with similar investment objectives to pool their savings, which are then invested in a portfolio of securities or other assets managed by investment professionals. Investors in Unit Trust Scheme or Mutual Fund do not purchase the securities in the portfolio directly.Ownership of the portfolio is divided into units of entit lement and each investor is known as a ‘unit holder’ (Dealing in Unit Trust, FMUTM, 2005) 11 1. 6. 2 Federation of Malaysian Unit Trust Managers (FMUTM) Federation of Malaysian Unit Trust Managers – an organization with the vision to develop unit trust as the preferred vehicle for saving and retirement. The objectives of the organization are (Dealing in Unit Trust, FMUTM, 2005): ? To improve the regulatory, fiscal and legal environment of unit trust; ?To formulate sound and ethical business practices, to promote the interest of the unit trust industry and provide investor protection; ? To provide information, assistance and other services to its Member; and; ? To promote public awareness of the benefit and risk of investing in unit trust. 1. 6. 3 Net Asset Value (NAV) The net value of the assets invested in the portfolio of the mutual fund. It’s a way to assess the net worth of the mutual fund. The value is computed every day after the closing of the share market. The NAV will be used to determine the price of buying and redemption of units trust. Dealing in Unit Trust, FMUTM, 2005) 1. 6. 4 Islamic Mutual Fund Islamic investing can be defined as investment in financial services and other investment products, which adhere to the principles established by the Shari’ah. These principles require that (Dealing in Unit Trust, FMUTM, 2005): (a) Investment must be made in ethical sectors. In other words, profits cannot be generated from prohibited activities such as alcohol production, gambling, 12 pornography etc. In addition, investing in interest (riba)-based financial institutions are not allowed. b) All wealth creation should result from a partnership between an investor and the user of capital in which rewards and risks are shared. Returns in invested capital should be earned rather than be pre-determined. 1. 6. 5 Attitude The extent to which one views a behavior as favorable or unfavorable, if a person perceives that there are positive outcomes resulting from an activity, then his or her attitude towards performing that behavior is likely to be positive (Ajzen, 1991). Attitude can be measure either through direct or belief-based measure.Belief-based measure of attitude is the weighted average of the strengths and outcomes evaluation of person’s behavioral beliefs (Ajzen, 2002b). 1. 6. 6 Subjective Norms An individual’s perception of social normative pressures, or relevant others’ beliefs, that he or she should or should not perform such behavior. It can be measured either through direct or belief-based measure. Belief –based measure of subjective norms is the weighted average of the normative expectations of others such as from family, friends or doctors and motivation to comply with their expectations (Ajzen, 1991 & 2002b). 3 1. 6. 7 Perceived Behavioral Control An individual's perceived ease or difficulty of performing the particular behavior (Ajzen, 1985). It is assumed that perceived behavioral control is determined by the total set of accessible control beliefs. It can be measured either through direct or belief-based measure. Belief –based measure of subjective norms is the weighted average of the strength of control beliefs and facilitation power of these beliefs (Ajzen, 1991, 2002b). 1. 6. 8 Behavioral Intention An indication of an individual's readiness to perform a given behavior.It is assumed to be immediate antecedent of behavior (Ajzen, 2002b). It is based on attitude toward the behavior, subjective norm, and perceived behavioral control, with each predictor weighted for its importance in relation to the behavior and population of interest (Ajzen, 1991). 1. 7 Significance of the study Mutual fund has become one of the important investment vehicles for the world’s economy. The launching of the Amanah Saham Nasional (ASN) in 1980 in Malaysia is part of the government efforts to increase the stakes holding of native Malays’ in Malaysian economy.The Unit Trust industry is an important component of the Malaysian economy. The industry serves to mobilize the saving of the average, small investors by funneling these savings into areas where capital is required. Investors want good returns on their savings, Mutual Fund provides an ideal way for them to gain exposure to investment that in the long run can produce returns superior to those from traditional savings accounts and fixed deposits. Study on the factors influencing the intention to invest and investment decisions will help the 4 industry formulate marketing strategies to further stimulate growth of this industry and eventually help in the healthy growth of the country’s economy. 1. 8 Organization of Remaining Chapter This research is presented in five chapters including this introduction chapter. The next chapter (Chapter Two) is the review of literature that outlined previous studies, from the review of literature; gaps are identified and new research framework is formulated for study in Malaysia context.Chapter Three will illustrate the research design, methodology used for data collections, and data analysis techniques to be used to analyzed and test the variables. Chapter Four will present the analyses done for the study and also the findings of the study. Chapter Five will discuss the interpretation and recapitulation of the study, implications of the findings, limitations of the study and suggestion for future research. It then concludes the whole research. 15 Chapter 2 LITERATURE REVIEW 2. 1 IntroductionFor better understanding of the present study, a comprehensive search of previous literature has been undertaken. As such, this chapter was organized in the manner to give an overview of literature, identify gaps, formulated theoretical framework and the hypotheses development. 2. 2 Literature Overview Mutual funds offer investors the advantages of portfolio diversification and professional management at low cost. These advantages are particularly important in the case of equity funds where both diversification and professional management have the potential to add value.For bond and money market mutual funds, the main advantage is transactional efficiency through professional management. There are many literature about the mutual funds in the developed countries. Literature are limited in the emerging market but are gaining popularity recently due to the tremendous growth in this industry. We will examine some literature in the emerging market, especially Malaysia as well as the international market. 16 2. 2. 1 Emerging Market research Investors made investment in the mutual funds with various investment objectives.Selecting mutual funds that will offer high returns with acceptable risk is a complex task. Literature shows that there are multiple factors that determine the performance of a mutual fund. Study by Ramasamy and Yeung (2003) on mutual fund purchaser in emerging country, Malaysia, s hows that among the factors dominating the selection of mutual funds are consistent past performance, size of funds and cost of transactions. Qualification and investment style of fund manager seems to be relatively less important. This means that in emerging market, the final performance of the funds is what matters.A study by Taib and Isa (2007) on Unit Trust Funds performance of Malaysian market from period 1991-2001 showed that unit trusts have not performed well over the share market index on the period of study. In most of the instances, unit trust trail behind the performance of the market portfolio except during the crisis period when the unit trust market adjusted returns yields positive results. Of the various types of unit trust under investigation, they found the bond funds showed very superior performance over and above the market and equity unit trusts.The high interest rate kept throughout majority of the period particularly during the crisis period in year 1997 has t remendously benefited the bond funds. The study also found no meaningful inter-temporal correlation between current performance and past performance. Low (2007) had studied on the Malaysia’s unit trust performance during the up and down market conditions has shown that the Malaysia mutual fund performance from 1996 to 2000 reported that the manager’s poor timing ability contributes significantly to the fund’s 7 negative overall performance. Such results suggest no economic benefit accrues to the average fund manager involving in market timing activities. The other study by Low and Ghazali (2007) examines the price linkages between unit trust funds and the stock market index during the period of 1996-2000. He finds in the short run, the prices of unit trust funds are related to the stock market index, but finds the nonexistence of long run relationship between the unit trust funds and the stock market index.This could possibly due to fund managers that are oblige d to adhere to their investment policies with the aim of maintaining a long term allocation strategy. One recent study by Lau (2007) on the investment style of fund managers of emerging market, Malaysia, indicates that most of the funds do not outperform the passive style benchmarks. Fund managers invest in large-cap stocks with cash enhances the performance of funds. Besides having a relatively high degree of style, funds that hold large-cap stocks together with a relatively high portion of liquid asset class tend to have higher alpha, translating into higher information ratio.It could be implied that liquid asset class enables fund managers to invest in stocks that improve their values in economic cycles. It is obvious that most of the funds concentrated on large-cap stocks, followed by medium-capital and government bonds. The Islamic Mutual Fund is gaining popularity in the emerging market like Malaysia and China. In the study by Abdullah, Hassan and Mohamad (2007) on the perform ance of Islamic mutual fund over three different economic periods namely pre, during and post economic crisis in year 1997 compared to the conventional mutual funds has shown that 18Islamic funds performed better than the conventional funds during bearish economic trends while, conventional funds showed better performance than Islamic funds during bullish economic conditions. In addition to that finding, both conventional and Islamic funds were unable to achieve at least 50 per cent market diversification levels, though conventional funds are found to have a marginally better diversification level than the Islamic funds. The results also suggest that fund managers are unable to correctly identify good bargain stocks and to forecast the price movements of the general market.In the past decades, there were wide variety of studies in consumer behaviors indicated a considerably consistent successful findings using the application of TPB model (Ajzen & Madden, 1986). The model was wide u sed in the emerging market to study the consumer behaviors. Study by Mohamed (2004) on consuming herbal supplement in Malaysia has indicated the suitability of the model. In his study, Attitude was found to be the strongest predictor of behavioral intention. Study by Chai (2006) on consumer behavioral intention to choose functional foods in Malaysia was also based on TPB model.The results showed that intention was strongly predicted by subjective norms followed by perceived susceptibility to illness, health value, attitude towards behavior and finally perceived behavioral control. Interesting finding in this study was perceived importance of taste did not have significant impact on intention. The other study by Muniandy (2006) using the integrated Decomposed Theory of Planned Behavior on internet stock trading showed that attitude, subjective norm, perceived behavioral control, descriptive norm and perceived usefulness have a direct significant 9 positive relationship towards behavi oral intention. In his study, the model was also compared to other intention based model like TAM, TPB and DTPB and found that IDTPB has better explanatory power. 2. 2. 2 International Research. In the research on the global growth of mutual funds by Fernando, Klapper, Sulla and Vittas (2003) indicate that the growth of mutual funds was likely to be determined by a number of factors. First and foremost is the level of income and wealth of the residents of a country.Conceptually, investing in mutual funds, like purchasing life insurance and saving for retirement, should be seen as a luxury good with a positive income elasticity of demand. In practice, however, the relationship between per capita income (used as an indicator of economic development and wealth) and holdings of mutual fund assets (expressed as a percentage of national income) is not always positive. In the same research on the global growth of mutual funds also indicated that the availability or not of substitutes as we ll as complements also greatly affects the growth of mutual fund assets.For example, houses are distant substitutes of mutual fund shares in household wealth but most other instruments are either close substitutes or close complements, in some cases both at the same time. Bank deposits, both the traditional form of checking accounts and savings deposits and the more modern money market deposit accounts, are close substitutes of money market mutual funds. The interest rate spread between bank deposits and money market funds would be expected to play an important part in determining the demand for money market mutual funds (Fernando et al. , 2003). 20The study by Otten (2002) to analyze the development and performance of the European mutual fund industry and compared it with the industry in the United States, found that Europe was lagging the American mutual fund industry when it comes to total asset size, average fund size, and market importance. Furthermore, it appears that a few la rge domestic fund groups dominate the mutual fund markets in the individual European countries. The study also showed that the performance of US equity funds was relatively poor compared to the European funds, and the outperformance of small cap mutual funds.In one of the extensive research by Fortin (2005) on international mutual fund management, he examined the international mutual fund returns for each category and overall returns for the 25-year period (1976-2000). The result of the study showed that there is no relationship between total return and expense ratio, but there is a significant positive relationship between total return and turnover, and a significant positive relationship between total return and fund size.Study by Huhmann and Bhattacharyya (2005) on Mutual Fund advertisement in Canada and United States has found that Mutual fund advertisements are not providing the information necessary for optimal investment decisions. In another word, mutual fund advertisements do not contain all the requisite information on the risk-return trade-off, principal-agent conflict, and transaction costs that consumers need to optimize their investment decisions. Mutual funds used techniques known to increase the likelihood that their advertisements are noticed, but they also use techniques known to decrease the readership of their advertisements.Also, they rarely included convenience information. 21 Philpot and Peterson (2006) study on the Real Estate Mutual Fund (REMF) found that team-managed funds have lower risk-adjusted returns than solo-managed funds. Managers with longer tenure on job tend to pursue higher market risk levels, and there was no relation between manager characteristics and management fees. Researchers have begun to recognize the importance of understanding consumers’ or investors’ intention and behavior and consequently, there has een an increase in the number of studies in this area. Many theories have been developed and evolv ed through time and situational change. Each has its strengths and weaknesses. Among the few popular theories are Theory of Reasoned Action (TRA), Theory of Planned Behavior (TPB), DecomposedTPB and Technology Acceptance Model (TAM). There are many more theories in the literature, however this research will concentrate only on the theories as listed above as they are related and well within the scope of study. . 3 Models Explanation (TRA, TAM, TPB and DTPB) The objective of the study is to determine the factors affecting the purchasing behavior of the investors in the Mutual Trust funds. Four alternative models – the Theory of Reasoned Action (TRA), Technology Acceptance Model (TAM), Theory of Planned Behavior (TPB) and the Decomposed Theory of Planned Behavior (DTPB), primarily adapted from Taylor and Todd (1995) – are here examined and compared. 22 2. 3. 1 Theory of Reasoned Action (TRA)The Theory of Reasoned Action was developed by Fishbein and Ajzen in 1975. TRA su ggests that a person's behavioral intention depends on the person's attitude about the behavior and subjective norms. If a person intends to do a behavior then it is likely that the person will do it. Furthermore a person's intentions are themselves guided by two things: the person's attitude towards the behavior and the subjective norm. Behavioral intention measures a person's relative strength of intention to perform a behavior.Attitude consists of beliefs about the consequences of performing the behavior multiplied by his or her valuation of these consequences. Subjective norm is seen as a combination of perceived expectations from relevant individuals or groups along with intentions to comply with these expectations. In other words, â€Å"the person's perception that most people who are important to him or her think he should or should not perform the behavior in question† (Azjen & Fishbein, 1980). The TRA is popular in applied to explain use or adoption behavior.Research by Buttle and Bok (1996) on hotel marketing strategy reveals the two predictor constructs contained in the theory, attitude-towards-the act and subjective norm, jointly explain about 65 per cent of the variance in the criterion variable intention to stay in the hotel on the next business trip. Other example of research is consumption of alcohol free beer (Thomson & Thomson, 1996). In his research, it was found that the main determinant of behavior was Attitude followed by the subjective norm. Control factors failed to improve the basic model. The basic framework of TRA is shown in Figure 2. . 23 Figure 2. 1. Theory of Reasoned Action One shortcoming of the theory of reasoned action is the consideration of behaviors over which people do not have complete control. Therein lies the notion of perceived behavioral control, or â€Å"the perceived ease or difficulty of performing the behavior† (Ajzen, 1991). As Hagger et al. (2001) note, this concept â€Å"reflects the person†™s assessment of the capacities (e. g. , skills and abilities) and the limiting or facilitating factors (e. g. , barriers and access to facilities) regarding behavioral engagement†.Theory would predict that perceived behavioral control influences both intentions (Ajzen, 1991) and actual behavior (Ajzen & Madden, 1986). Another limitation of the theory is that the theory stems from the assumption that behavior is under volitional control. 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