Business Research Process Essay

Abstract The business research process is an important tool that can help the marketing in a business. By using the steps of this process managers are able to make decisions based on the study of the consumer and target audience. It is also important to identify the competitors in order to stay profitable and competitive. Business Research Process The business research method involves the studying of all parts of a company, the customers, and the market to make important decisions for the business. The strengths and weaknesses of a company are evaluated but especially how a customer views their goods and merchandise. Management studies the competition and the industry that which they are a part of. As part of the management at AZ Alarm Company, I make use of the business research process myself. The first step in this process is to identify the significant competitors in the industry. In the alarm industry it is important to know what other companies are offering so that we stay competitive and bring in new customers while still making a profit. Most of this information is readily available and easy to obtain. The second step in the process is to study the customer or consumer. Doing this enables management to find out what the needs and wants are in order to create new products. By analyzing this information it is also to be determined the amount of money someone is willing to spend on these services. After this information has been gathered it is ready to be analyzed. Companies sometimes use the SWOT (Strengths, weaknesses, opportunities, and threats) analysis. This method enables a business owner or management to enhance their strengths and to figure out what needs to do to change their weaknesses into strengths. Opportunities need to be taken advantage of and utilized because they will not always be available. The target audience also needs to be taken into consideration. If a business is marketing to people that will not use or benefit from their product or service they will not be able to meet their full potential. This can also affect their profit and gain immensely. All of the steps in the business research method are only effective if the information is used and applied to develop and better their marketing strategies. Collecting and analyzing data is something that is ongoing and should be done continuously. As times and technology change so does a consumers wants, needs, and preferences. At AZ Alarm we are always to striving to have the newest and latest technology but also at a competitive price so that we stay on top. References Cooper, D., & Schindler, P. (2011). Business research methods (11th ed.). New York, NY: McGraw-Hill/Irwin. Suttle, R. (2013). The Steps in a Business Research Process. Retrieved from http://smallbusiness.chron.com/steps-business-research-process-3294.html Suttle, R. (2013). What Is a Business Research Process?. Retrieved from http://smallbusiness.chron.com/business-research-process-3279.html

Lab Report Eugenol

Introduction Eugenol is a naturally occurring chemical that has medical applications such as its use as a natural dental anesthetic. It can be extracted from cloves by using the method of steam distillation. The extracted compound will then be separated from the water using methyl chloride, which will then be evaporated using a rotary evaporator leaving only the essential oil, Eugenol. IR spectroscopy will be used to determine the structure of the extracted compound. Results and Discussion Four samples of Eugenol were combined to be analyzed for the final product.A lower percent recovery, as indicated by Table 1 could be due to the fact that much of the weight of the cloves was not actually eugenol. Cloves Used| Eugenol Recovered | Percent Recovery| 10 g| 7. 304 | (7. 304/40) x 100% = 18. 26%| Table 1: Calculations of the percent recovery of Eugenol. Figure 1: The structure of Eugenol. The IR spectroscopy run on the sample gave results as shown in Table 2. The –OH stretch acco unts for the hydroxyl group on the aromatic ring as shown in Figure 1.The C-H peaks are from the mexthoxy group on the aromatic ring. The C=C-H are a result of the hydrogen’s bonded to the carbons of the aromatic ring. The peak from the C=O stretch is not from the compound, but may be a result of product contamination. Absorbance | Shape| Intensity| Group-motion| 3512. 21| Broad| Weak| H2O or –OH stretch| 3072. 52| Sharp| Medium| C=C-H stretch| 2948. 85| Broad| Strong| C-H stretch| 2845. 80| Sharp| Medium| C-H stretch| 1767. 18| Sharp| Weak| C=O stretch| Table 2: IR Table of sample taken.Experimental Extraction of Eugenol began by taking 10 grams of cloves and placing them in a 250mL round bottom flask. This flask was then attached to a steam distillation apparatus and heated to the boiling point of about 100Â °C. The steam was condensed and collected in a graduated cylinder. This collected material consisted of water and the eugenol contained in the cloves. 100mL of the product was collected and placed into a separatory funnel. The eugenol now had to be removed from the water by adding 15mL of CH2Cl2 and shaken.The layers were allowed to separate. The CH2Cl2 layer was more dense than water and sank to the bottom of the funnel. The bottom layer was collected and another 15mL of dichloromethane was added to the funnel to repeat the process. This was repeated yet again to obtain a final amount of 45mL of dichloromethane with eugenol dissolved in it. The 45mL of product was moved to a 100mL Erlenmyer flask. The next step was to dry the mixture with 0. 5g of CaSO4 to remove any excess water in the mixture.The flask was swirled to allow for the CaSO4 to collect any water. The product was then allowed to rest and was put through a filter to remove the CaSO4. Once filtered, four different samples were collected in a single 500mL round bottom flask. This product was then placed onto a rotary evaporator to evaporate away all of the dichloromethane and le ave behind only eugenol. This was achieved because the boiling point of the dichloromethane was much lower than that of eugenol. The final product was then analyzed by IR spectroscopy.

Assess the View That Cults and Sects Are Only Fringe Organisations That Are Inevitably Short Lived and of Little Influence in Contemporary Society Essay

It can be argued that cults and sects are only fringe organisations that are inevitably short lived and of little influence in contemporary society, however some may have views to contrast this idea. A sect is an organization, which usually breaks off from an established religion, which finds itself in disagreement with beliefs and values of wider society and refuses to tolerate the beliefs of others. Although the desire to be a member is voluntary, as oppose to being born into, like religion, sects are rejected by society and claim strong obligation and commitment by its members. A sect is an extremely narrow-minded organisation, which is often led by a charismatic leader. Whereas, in contrast, a cult does not progress from a mainstream religion and does not reject or challenge societal norms. However, as tolerant of other beliefs as they are, they still attract a great deal of negative press, for example brainwashing. Members in a cult are usually more like customers than followers. An example of a cult is Heavens gate, which is a destructive doomsday cult, centered in California. There is a mass of supporting evidence that cults and sects are short lived and insignificant to wider society. Nevertheless, it must be maintained that the matter is complex as there are many sects and cults, which identify themselves differently. There is evidence to support this view of a short-lived nature of sects. This is due to many reasons. World rejecting sects, due to their nature and succeeding societal rejection and stigma of bad press, must be able to compromise with society and becoming a denomination and therefore cease to be a sect, if this is not done then the sect will die out. There is also an argument that sects cannot have a great deal of affect upon society over a long term period as they cannot survive past the charismatic leader’s lifetime and therefore sustain themselves over more than one generation. The American theologian Niebuhr theorises that another reason for transience of sects is that they rarely live past the 1st generation because the 2nd generation usually lacks the belief of the 1st. In this way, their membership dwindles as the 2nd generation chooses to leave the sect and hold other views in wider society. However Wilson disagrees with Neibuhrs view and says that he overates his case and chooses to not pay attention to groups who did preserve a ‘ distinct sectarian stance’. Similarly, evidence proves to discredit the belief that a sect fails to live on past their leader’s death. For example, The Mormons have continued for many generations and also the Amish- however this could be attributed to the protective ‘isolation-like’ in which they live. There is also a possibility that the Moonies surviving is due to the leader preparing for his son to take over his position as the charismatic leader after his death, however this is yet to be seen. Cults have seen a large incline in their number recently and because they are more accepting of wider society and despite receiving bad press, offer a practical solution to peoples’ issues and wishes, seem less likely to die out due to refusal and disapproval. They are also financially rather stable, the Church of Scientology for example has an estimated income of over  £200m per year. This is down to the consumer attitude of cults. There is also a mass of evidence for their importance in society in a sense that audience cults have a mass market of ‘self help therapy’ there are many books available for example, tarot reading, crystals and reflexology regularly appear on the best seller list and often more room is devoted to these books rather than Christianity books themselves. The view that cults are fringe movements is less supported than that for sects. Sects very infrequently continue on as sects but cults such as scientology are not only prosperous but also have a huge celebrity following trend; admired by the public for example Tom Cruise. There is also evidence that sects and cults can be of great influence to society – though it is debatable as to whether or not that is possible today in a society as apparently secular as ours. Weber suggests in his Theodicy of Disprivilege that because they offer a solution to problems: justification and explanation for life and its problems, to marginalised groups such as dropouts or ethnic minorities, world rejecting sects that offer status appeal to people. An example of this is Liberation Theology which was for the poorer people which had great influence upon the priorities of the Catholic Church in Latin America (though it has become more conservative, it continues to represent human rights and democracy). Bruce argues that it is not a religion and is instead a shallow, meaningless thing. Due to the elements of choice it offers, the choice about which bits to believe and whether to take its readings into account, it does not require commitment. This he argues prevents it having religious status. Post Modernists see it as being spiritual shopping: it is part of a consumerist culture. Despite not necessarily being a religion, there is lots of evidence to show that it has influenced society as a whole and, some sociologists would claim, aided secularisation. There is also evidence to show that it is unlikely to be particularly short lived as it fits in so well with our Capitalist, consumerist society and our individualistic values and is so profitable. Therefore, though there is strong evidence to show that sects and cults are ‘fringe organisations’, there is sufficient evidence to suggest that neither are short lived in themselves either through the Sectarian cycle or demand and supply (though sects tend to become denominations) and also to suggest that the influence of sects and cults on society is greater than expected; though the influence of sects and cults is exemplified by older examples and so one cannot be sure as to how successful they will be in today’s society, except in regards to specific sects and cults. In conclusion, the view that cults, sects are fringe organisations that are inevitably short-lived and of little influence in modern-day society, is on the whole not wholly correct but has some strength in that the permanency of all is arguable as is their status as fringe organisations.

Knowledge, Truth, and Belief Case Study Example | Topics and Well Written Essays - 500 words

Knowledge, Truth, and Belief - Case Study Example Hence, assumption of burnt bulb cannot be taken as final but considered along with the issue of fuse. Only when the fuse is also tested, that the reality of bulb being burnt or not can be conclusively defined. Thus, rational approach of problem, where well articulated or logical arguments become basis for problem solution, needs to be adopted. (words: 158) Russell’s approach of looking at things is hugely important because it uses empirical knowledge to interpret the world around from wider perspective of rational approach. He believes that perceived reality is important part of human interaction with the world which is often interpreted in context with the real life situation. While perception is linked with the sensory organs, its interpretation and understanding hugely depends on cognitive processes that relies on manipulation of information as stored in memory. At the same time, Russell also employs skepticism to understand emotional and metaphysical reaction. The expanding knowledge promotes rational approach where skepticism facilitates in coming to the right conclusion. As part of experience, skepticism helps to evolve options that support not only accrued knowledge comprising of scientific and priori knowledge but also the intuitive and inductive knowledge that comes from experience. Hence Russell’s approach lends credibility to the wider empirical knowledge of rationalization process. (words: 151) Out of the variety of considerations that Reid presents in support of his common sense position, I believe the strongest argument is that human intellect is most important factor in social interaction. The human intellect takes into consideration the conscious and unconscious working of mind along with the ability to rationalize events based on construction and deconstruction of object reality. The cognitive theory helps to explain why and how the events take place and subsequent pattern of

External vs. Internal Recruitment Essay Example | Topics and Well Written Essays - 1250 words

External vs. Internal Recruitment - Essay Example Recruitment refers to the process of locating potential applicants and encouraging them to apply for the anticipated or existing job openings. In simple words recruitment strategies are adopted with the purpose of creating a group of qualified, experienced and skilled people beforehand so that selection processes becomes easier and effective. In other words, recruitment is all about finding the right people in the right place at the right time with the right price. The entire recruitment process involves five key steps. These are preparing, selecting the recruiter, sourcing the candidates, taking legislative aspects into consideration and selecting the methods to be applied. The preparation process involves deciding on the various alternatives of recruitments. Sourcing of candidates might be done through consultants, the internet, and advertising. Each and every recruitment exercise can be considered as an opportunity of analyzing the job, updating person specification and describing the job. The main objective of any recruitment process is to ensure the presence of adequate and effective staffs in the organization. To guarantee this, appropriate people must be made aware of the existing job opportunities and efforts must be taken to make sure to these vacancies are properly filled. There are internal recruitment and external recruitment. Between the two the one that would be chosen depends on human resource policies, organizational strategies, financial condition and employee morale.

Spyware and Adware Essay Example | Topics and Well Written Essays - 1000 words

Spyware and Adware - Essay Example They can enter the computer through ports or by downloading freeware software or any game from the internet (Michael 2010). For the safe working of the computer it is very necessary that the computer has some antidotes for such malicious soft wares and viruses. Because these malwares and viruses are very harmful for your computer as it can completely make your computer useless. Many anti-spyware soft wares, antivirus soft wares, firewalls are easily available on the market. But here a question arise, which software to choose for the better and complete protection of the computer? The two most commonly available soft wares are antivirus software and firewall. Firewall is software that runs on your computer and provides you with first hand protection. It controls and manages all the network traffic and clearly monitors which data is to be forwarded and which not. This action will be performed according to a set of predefined instructions. A firewall will stop all internet traffic from unauthorized sources; it will even block your internet connection first and will allow access to only a limited number of trusted sites. However, slips can occur at a port and then your computer will be at a risk if you do not have any further protection on your computer (Elizabeth 2010). On the other hand antivirus software is software that scans the computer for any viruses, hackers or malicious soft wares such as Trojans and worms and removes it from the computer. It will alert you if you are downloading any free ware software, games, songs or videos or opening a website containing a virus. It will tell you to immediately terminate your activity and will then run a check and remove the virus (Gordano 2012). A firewall can only protect you from hackers and some malicious soft wares or any other internet traffic entering from the port. However it will not be able to protect your computer if any malware manages to enter the computer or any virus enters the computer through downloade d software or game. An antivirus is very necessary for your computer so that it can scan through your hard disk and computer and detect any malware and virus. A malware or a virus can enter your computer through a USB or a CD; it can enter the computer through a downloaded software or game as well. If the virus enters this way a firewall alone cannot manage to remove the virus or malware. However, the antivirus software can alone manage to remove the viruses and malicious software no matter by what means the virus or the malware enters the computer. However, for the complete protection of your computer it is recommended that you have both firewall as well as antivirus software (www.antivirusfirewallsoftware.org 2007) Task2 For people who are new to using computer, they are generally unaware of the different soft wares and facilities that are available for the protection and increased efficiency of the computer. A new comer is also unaware of the threats to which a computer is liable and the extent to which a computer can suffer due to a virus or a malware. He can use a computer without installing any protection software and can cause the computer to hang or even the computer can get into a condition in which it becomes completely useless. Therefore it is necessary that when you are new to using a computer you get help and guidelines from an expert or at least the one who has been using a computer from a quite a lot of time about all the needs of a computer, the threats that a computer can face and the various solutions

Others Assignment Example | Topics and Well Written Essays - 250 words

Others - Assignment Example The retail establishment will offer a variety of coffee products using high quality coffee beans. The products will be differentiated to meet different customer needs. The bakery will provide fresh pastry and bakery products. The company will prepare six batches of pastry and bakery products to ensure fresh products are available at all times of business hours. The retail coffee industry in Canada is growing rapidly. The climatic conditions of Ontario encourage the consumption of hot beverages. Westside Bakery and Java will concentrate its marketing and business on locals, who will be the dominant market. This strategic move will benefit the company by establishing a consistent and healthy revenue base, which will ensure the business is stable. Strategic location of the company, high quality products, and excellent service delivery will be crucial in achieving the company’s targets. Westside Bakery and Java expects to borrow $50,000 and raise $150,000 own capital. The company expects annual sales worth $400,000 in the first year, $600,000 in the second year, and $700,000 in the third year. Westside Bakery and Java will break even by the sixth month of operation. The company anticipates profits of $10,000 in the first year, $30,000 by the second year, and $50,000 by the third year. Westside Bakery and Java does not anticipate any cash flow

El-Con Construction Inc Case Study Example | Topics and Well Written Essays - 1000 words

El-Con Construction Inc - Case Study Example Rob Lister, the CEO of Oakville Hydo though that El-Con was qualified for the loan based on its recent performance though he did not know if granting the loan was in the best interest of Oakville Hydro company. Based on the company previous performance, there are several ways in which it could maximize and optimize its shareholders wealth. It is therefore recommendable for El-Con to seek different ways of maximizing the shareholders wealth before settling on the best. The best ways or strategies to optimize owners wealth is by ensuring continuous cash flow in the company. Different scenarios on which the firm can optimize its shareholders wealth will be discussed. The different scenarios for considerations include initial public offering and investing its excess funds to maximize profit, obtain a loan to obtain the required funds-Building credit and Shareholder wealth. 1. Initial public offering and investing its excess funds to maximize profit The company should hold initial public offerings and sell them as common stock to the public. Based on the previous performance, the company can thrive well without the common stock but should go for it in order to obtain enough funds to tend to all of its constructions needs. The use of initial public offering will help in profit maximization. Initial public offering will help the company to expand its investments as it will provide the company with enough liquidity. Liquidity ratios 2009 2008 2007 Current ratio 2.8 2.73 3.38 Acid test 2.31 1.72 1.75 Working capital 2.8 2.7 3.4 The current ratio and acid test of the company for the three years was more than 1 which means that the company was in a better position to cater for its liabilities and obligations using its assets. Working capital measures the efficiency of as well as its short term financial health. The ratio determines whether the company has enough short term assets to cover its short term debts. The working capital ratio for the company for the three years is more than 2 which means that the company was not investing in its excess assets and its lack of enough funds can be attributed to that. This means that the company is in a better financial position since its assets outweighs the liabilities and should invest its excess assets to earn income. The company should choose to invest in mutual funds, real property or even insurance products. This will earn the company interest. Investing the excess assets will be a good way for maximizing income by the company which would then earn the company enough capital for the required machinery. Using initial public offering and investing its excess funds will be of help to El-Con as it will help the company to acquire the required liquidity for it to acquire the required machines. The required amount of $450,000 for hydrovac truck and $50,000 to cover its working capital needs is a small amount for the company judging from the past performance and could therefore be acquired by initial public of fering and investing in excess assets. 2. Obtain a loan to obtain the required funds-Building credit Obtaining a loan like the loan request from Oakville Hydro could another good way of maximizing the shareholders wealth. Building credit is a deliberate and a planned borrowing which is aimed at increasing the reputation of a firm in the lending market and granting it a larger access to large sums of capital. This greater access of money helps the company in financing stronger expansion and allows it to generate real wealth. The working capital of El-Con for the three years indicates that the current assets are more than the current liabilities which means that it does not have any problems paying for its obligations. As a result, building credit by borrowing

Ohio Infant mortailiy rate Essay Example | Topics and Well Written Essays - 750 words

Ohio Infant mortailiy rate - Essay Example The two journal articles are â€Å"The Impact of Prenatal WIC Participation on Infant Mortality and Racial Disparities† (Khanani et al., 2010) and â€Å"Infant death among Ohio resident infants born at 32 to 41 weeks of gestation† (Donovan et al., 2010). The journal article by Khanani et al. (2010) entailed a research project that sought to assess the significance of Special Supplemental Nutrition Program for Women, Infants, and Children as a measure to enhance birth outcomes and reduce racial disparities in Ohio. On the other hand, the journal article by Donovan et al. (2010) entailed a research project that sought to assess the infant mortality rate of Ohio children born at 32 to 41 weeks. Apparently, the two journal articles have different research questions. The article by Donovan et al. (2010) sought to determine the gestational age-specific and the adjusted infant mortality rates for Ohio residents. The journal article by Khanani et al. (2010) sought to establish how prenatal Women, Infants, and Children services influence infant mortality rate and racial disparities in Ohio. Notably, the two articles used a retrospective cohort design to collect data. In the article by Donovan et al. (2010), the research relied on a multivariable regression analyses to collect data on all Ohio births and infant deaths from 2003-2005. In the article by Khanani et al. (2010), the research relied on data from the Ohio Department of Health, Bureau of Nutrition Services, and Department of Vital Statistics. The data collected included infant deaths, live births, and WIC prenatal participants from 2005 to 2008. The research excluded duplicate records and used a Visual Basic program to link the WIC prenatal enrollee data to the live birth data using specific data elements (Khanani et al., 2010). The research also used the infant death certificate to collect infant death data and linked the infant death records using

India, the Sleeping Giant, Has Now Awakened Essay

India, the Sleeping Giant, Has Now Awakened - Essay Example India, â€Å"the sleeping giant,† has now awakened and has been brought into the forefront of economic progress through â€Å"brain power.† In the recent years, India has come to known in the corporate world as being able to provide reliable, bright, and hardworking â€Å"digital workers.† Large companies such as GE have made India one of their more important bases of operations, which has engendered a job explosion in the country and a loss of jobs for many Americans. Furthermore, it is not only Americans who outsource, other countries also come to India—and not the U.S. anymore—for the best innovative ideas at a lower cost. Corporate America needs to adjust to the â€Å"India Effect† through a retraining of workers and an increase in educational preparation. If the U.S. manages the India Effect in the right way, this could result in â€Å"a brain gain that accelerates productivity and innovation† (Kripalani and Engardio, 2003). India has reinvented itself through brain power at the detriment of the American economy. It is true that this has led to many Americans losing their jobs and this may also pave the way of America being dethroned from the high seat of innovation. However, the authors made a good point by stating that this could also lead to the US being forced to become better and brighter. Banning outsourcing is not the solutionIf this is handled correctly, even in the midst of a recession, the US can emerge from this stronger and more competitive.

Pharmaceutical Industry Essay Example | Topics and Well Written Essays - 500 words

Pharmaceutical Industry - Essay Example This is to ensure the safety of administering a new drug to health volunteers and patients (Novartis 2004). Prior to the therapeutic trials in patients, which is the Phase 1 trials, the pharmaceutical company will need to have: the preclinical testing data and findings from the laboratory studies, the manufacturing information, clinical protocols and investigator information in the form of an Investigator's Brochure which will contain all the information about the study drug (MHRA 2006). This information will be required by the licensing authority, which in the UK is the Medicines and Healthcare products Regulatory Agency as part of the application for a Clinical Trials Authorisation which would enable a trial to be conducted in humans. In addition to this Authorisation, the pharmaceutical company will need to obtain a favourable ethical opinion and approval from the site where this drug will be tested. Once all required approvals are in place, the drug can be tested in a Phase 1 trial in healthy subjects. If the results of this trial are positive and no serious adverse events or suspected unexpected serious adverse events occur, then this progresses to a Phase 2 trial in subjects with the disease or medical condition. The key issues that

Human Resources Essay Example for Free

Human Resources Essay Employees are always considered an asset to the organization. However organizations can never estimate what amount of this asset is required. Usually the number of employees is either higher than wanted or lower than wanted. Thus to cope up with either surpluses or shortages organizations have a number of methods that are as follows: To manage shortage of employees The first and foremost method to slash shortages is recruiting more permanent employees. This increases the number of workforce as required by the organization. However increasing new employees increases costs for the organization as well. Another method to overcome shortages is to retain employees within the organization who are retiring and offer them added incentives on a late retirement. Similarly another approach to lower down costs and still come over shortages can be to hire retired individuals again on a part time basis. This helps the organization to meet the shortage requirement in an efficient manner as no training is required and also the part time wages are low. Another approach can be to reduce turnovers by providing benefits such as premium pay etc. This is an effective way to retain old employees but can elicit a bidding war which the organization might not be able to control for a long time (Caruth, 1997). Over time and subcontracting is also a good way to deal with shortages. Sub contracting is an expensive procedure but obviously for a short time the company could afford to contract employees. Temporary hiring is also an option and is somewhat similar to sub contracting. Redesigning the job processes so that lesser employees are required is also a way to deal with shortages. This method though requires training so that employees adapt to the new job design and are comfortable with it and doesn’t result in heavier workloads and lowering down the talent level. To Manage Surplus of employees Surpluses are easier to manage then shortages. Stopping the hiring process, no replacements of those who leave, layoffs, offering early retirements etc are one of the most commonly used downsizing techniques (Mathis, 2004). Downsizing activities however have a negative effect on existing employee’s motivation and thus are usually avoided by most organizations. By introducing the shift system, number of hours worked can be reduced and efficiency of employees can be increased. Similarly, outsourcing or temporary employees shouldn’t be hired as there is already a surplus. To lower down costs, the company can either cut down pays across the board or switch to a variable pay plan (number of hours worked multiplied by per hour rate). In either way those with a lower pay or those who work lesser hours will prefer finding a new job that pays them more. Training is also a good way to deal with surpluses. Train half of the employees at a given time and let the other half work then train the later half and let the first half work. Though this is also something expensive and in the long run of no benefit to the organization. Voluntary severance is also another way in which you ask employees to volunteer if they want to leave the organization. Another way to utilize abundance of employees is by expanding operations. Though a firm cannot expand operations overnight nor it can expand them just to accommodate extra employees when there is no need of an expansion. Job Description My current job is as a sales and marketing executive at a technology corporation. I report directly to my sales and marketing director. The basic purpose of my job is to plan and carry out product activation and brand awareness activities in order to increase and sustain sales of my company. The core responsibilities of the job include developing and maintaining a database of customers and potential customers, to plan and carry out sales activities, develop new ideas, keep a track of sales performances, provide management with relevant information, frequently research on the market, the competitors and the customers in order to cope up with the changing needs, make connections with clients for business and organizational development, conduct training sessions to pass on my learning, skills and knowledge to my juniors. Apart from these I have to readily keep my colleagues up to date with all relevant information so that the department is on the same page in meetings or conferences. Communication is one of the foremost things in my job and I have to take care that relevant information reaches the pertaining individual on time. Redesigning the job description In order to redesign my job description following the exhibit I think the first thing that should be focused upon is that the job shouldn’t be monotonous as it is in the above mentioned case. The duties should vary from hard to difficult and from usual to unusual. Skill variety should be a basic part of it. This will lead to an increase of interest towards the job and thus will increase my motivation. My performance will also be definitely improved as I will be learning something different every time and this will be adding to my experience and skills. This will also alleviate the redundancy in my job to some extent (Tanke, 2000). One thing that I feel is lacking in my job is the power of making decisions on my own. As already mentioned I report to my director. At times he is not in the field and he does not have the true picture. In such cases a delay in decision making can be costly for the organization. Thus sales executives should be given the autonomy to at times make decision on their own which can benefit the company. Obviously everyone knows that wrong decision will result in losing the job. So every employee will definitely think for the best of the organization before taking any actions. Employee empowerment results in increasing employee confidence and provides them with new experiences particular to dealing with responsibilities. In turn, employees are satisfied with their jobs, feel a relationship with the organization and get a morale boost. One way to make an employee feel important is to provide feed back. Feedback tells the employee if their work is appreciated or not and in what areas they need to improve. If my director gets feed back from a client on any activity that I planned then it should be known to me as well. Apart from this there should be a little more flexibility in the management attitude so that they also understand that every employee has different needs (Tanke, 2000). Like my job could be more exciting if the management does not keep me sitting in the office just to fill in the hours an employee has to be on his seat. It would be beneficial for both if I am out in the field and monitoring and assisting in the sales activities. All these steps will definitely improve performance, motivation and satisfaction.

Critical incidents and our behaviours.

Critical incidents and our behaviours. What is critical incident? Critical incident has been defined in different ways depending on the nature of the incident and the environment or setting where it took place. Tripp (1993) defines critical incidents as a commonplace events that occur in routine professional practice Incidents may relate to range of issues amongst which issues of communication, relationships, moral beliefs and ethical values, knowledge, culture or emotions. The definition I like best is that a critical incident need not be a dramatic event, but it is an incident which has significance for us. It is often an event which made us stop and think, or one that raised questions for us. One that may have made us question an aspect of our beliefs, values, attitude or behaviour. It is an incident which in some way has had a significant impact on our personal and professional experience and learning (MU). Curiosity is a basic human emotion. The psychologist William McDougall states that The instinct of curiosity is at the base of many of mans most splendid achievements . As humans we all have the drive to find rational explanation of lived events and our surrounding. We do that though trying to examine or reflect on our experiences. According David A. Kolb (1984) reflection is an inseparable part of the learning process. This is the part during which by analysing given event we enhance our knowledge, enrich our practical experience and prepare for new and challenging situations. Different frameworks have been developed to aid the development of critical reflection. Most prominent are the models of Kolb (1984), Gibbs (1988), Atkins and Murphy (1994), Johns (2000), Rolfe et al (2001) and Lister and Crisp (2007). Lister and Crisp explain that critical incident analysis has developed as a tool to aid critical reflection in practice, in health and social work. It has been used to enable students to describe and explore issues from their practice (Nygren and Blom 2001), (Montalvo 1999). PoDAIT describes that Critical Incident Analysis is an approach to dealing with challenges in everyday practice. and that As reflective practitioners we need to pose problems about our practice, refusing to accept what is. We need to explore incidents which occur in day-to-day work in order to understand them better and find alternative ways of reacting and responding to them. Therefore it is safe to conclude that critical incident analysis can enable professionals to reflect on their practice and to explain and justify it. Account: During my placement at a south London CMHT I had short period of working with the duty team. This was when I and the MH nurses Q met Miss X for an initial assessment. Several days following Miss Xs assessment her case was discussed at a clinical review with one of the team consultants DR G and it was decided that the dosage of her medications is to be altered. When I informed her GP of the above I was told that her medications have already been adjusted and that the dosage is different from the one given on her referral. This created the need for reviewing Miss Xs case second time. In the meanwhile Dr G left the team and was replaced by Dr V. By that time I had finished my period of duty work and despite the fact that I had recorded all information on the internal database and that Miss X was still a duty client I was asked to present her case at Dr Vs next clinical review. I had no objections as I had knowledge of the client, and especially as Q was not present. At the review was decided that Dr. V will offer Miss X another appointment. I recorded the outcome on the internal database and also reported to Q who happened to be on duty shift. I also informed him of the need for Miss X to be notified of her appointment. On the agreed appointment date Miss X did not attend and when contacted by phone she stated that she was not notified of it. Dr V asked me to offer her a new appointment for the following week. I had no obligation to liaise with the Miss X or do any work on the case as she was a duty client and I no longer had formal involvement with her. Nevertheless, I notified her of the new appointment did both over the phone and in writing. When the second appointment came Dr. V asked me to attend the assessment with her. I was not required to, however I accepted. I decided that while Miss X would be more comfortable with a familiar person during the meeting, I would have good learning opportunity attending an assessment conducted by one of the team consultants. When Miss X arrived I introduced Dr V to her. During the assessment Miss X said that her medications have not helped and that she cannot cope. During the assessment she was wringing her hands and became tearful. Dr. V identified that Miss X had not been taking her medications at the appropriate time and that sleeping in the afternoons could be contributing to Miss Xs difficult night sleep. During the assessment Dr. V suggested that she can prescribe Miss X a number of different sleeping aid medications. However, at the end Miss Xs medications were not changed and she was told to continue with her current ones, but to take them at the prescribed times. Dr V informed Miss X that she will offer her a follow up appointment in two weeks time, in order to assess her progress and to change her medications as and if necessary. Following the assessment I went to the duty workers and asked them to come for an update from Dr. V. Two of them were busy and the third one Z who is a MH nurse was dismissive. As I could not get anyone from the duty team to come I went to the doctors office for final discussion and planned to record the outcome of the assessment and any decisions on the internal database. While we were discussing Miss Xs action plan Z entered the office. It was jointly agreed that Miss X will be offered follow up appointment in two weeks time. Later in the day Z came to me and asked me whether I have recorded the appointment in the duty diary. I informed her that I have not as my understanding was that this is consultants appointment rather than a duty one, which is normally not recorded in the duty diary. Nevertheless, she insisted that I do so. As I recorded the appointment in the diary, which I found on Zs desk, Z came and asked me not to make the appointment for the agreed date but for the day after. She explained that the appointment fell on a day which should be free of duty appointments. I was obviously confused as the date was chosen by Dr V and the other 2 previous appointments were both booked for the same day of the week without that being a problem. Z said that she has spoken to Dr. V regarding the appointment already. While trying to be helpful, having been given ambiguous information and the fact that Miss X was not my client to start with, I decided to step back and asked Z to clear any confusion with Dr. V. On the following day during Dr. Vs clinical review meeting Z presented Miss Xs case with suggestion for her to be discharged back to GP. To my big surprise Dr. V agreed with the suggestion. The rest of the team approved her decision silently. As the team had moved onto discussing other client I did not want to interrupt and did not speak out until the end. Having considered the distressed and tearful state in which Miss X presented, during the two assessments, her reports of feeling hopeless and without support, and her previous suicidal ideation, I asked if we could have another look at her case and perhaps offer her one more appointment before discharging her from the team. Dr. V said that she had reconsidered her yesterdays decision and assert that Miss X presented low risk; therefore she did not require further input from a consultant. In principle I agreed that Miss X may not have to be seen by a consultant. Nonetheless, I still felt that it would have been appropriate and an example of good practice for a member of the team to see Miss X before discharging her, especially after she was told to expect further support. Z suggested that I should take the case on. I explained that without my placement tutors permission I am unable to accept any new clients. Z suggested that keeping her as a client for an extra week or two puts strain on the duty team and suggested that as alternative to face to face appointment I can call the client. I agreed to that, but highlighted that due to my student capacity I would still have to be supervised by a team member. One of the senior social workers commented that I will be given credit towards my competencies, for adv ocating for the client. My request was left unanswered and Z said that she would deal with the case. Following the meeting another member of the team also a MH nurse spoke to me and said that I should not have brought up this question and contested the decision made by the consultant. I provided my practice assessor with a report of the situation however, it never went any further. I tried to look at the whole process and the outcome from Miss Xs perspective and tried to explore her feelings. Removal of formal and informal power barriers between the su and s providers Did not feel like I could change the decision and speaking to the cons. Would not have been benefitial. I was surprised if not even shocked by the consultants decision. Earlier I had observed (noticed) a certain level of indecisiveness as whether to prescribe different medication s or not have offered a range of different meds however did not stick to any of her own suggestions. Reflecting on that I tried to justify her behaviour accepting the fact that along the assessment different new information came to light. (reflected on her actions and decisions made) Power dynamics, my student and consultant Being familiar with the details ot the case I felt it was morally and ethically unjust to remain silent and not bring the matter up Being assertive but not argumentative (being diplomatic) in this situation my believes and values clashed with the decision taken What was the right thing to do. Keeping in mind my status in the team as student on placement, without extensive social work experience and not familiar with the power dynamics within the team I was double minded as to whether to Express my disagreement by suggesting an alternative approach to the situation and in this way challenge the decision taken by the consultant or to remain silent. In this situation the final decision about the care of the patient was being made. I (felt) was aware that once the decision was made speaking in private with any of the participants would not be constructive or bring positive results. Learning No one likes being challenged and when this happen some people may become self-protective and resistant to accept others views which may also impair future joint working. It is important to highlight that by challenging certain decision it is only the decision being challenged and not the person. After all the joint goal is the wellbeing of the client and not proving who is right or wrong. Be aware of office power dynamics and be mindful that some professionals may be strongly opinionated and confronting their views on a particular matter has to be made with care and in non confrontational approach. Sensitively approach and challenge others opinions try to (prevent from happening) diffuse charged emotionaly situations (to be diplomatic) When analysing a critical incident, it is useful to ask yourself questions such as: Why do I view the situation like that? What assumptions have I made about the client or problem or situation? How else could I interpret the situation? What other action could I have taken that might have been more helpful? What will I do if I am faced with a similar situation in the future? Refs: Atkins, S Murphy, K (1994) Reflective Practice Nursing Standard 8 (39) pp49-54 Evans, D. (1999) Practice Learning in the Caring Professions, Aldershot, Ashgate. Gibbs G (1988) Learning by doing: A guide to teaching and learning methods. Oxford Further Education Unit, Oxford. Johns C. (1995)Framing learning through reflection within Carpers fundamental ways of knowing in nursing. Journal of Advanced Nursing 22 p. 226-234 McDougall W. (2003), An Introduction to Social Psychology, Courier Dover Publications Rolfe G., Freshwater D., Jasper M. (2001), Critical Reflection in Nursing and the Helping Professions: a Users Guide. Basingstoke: Palgrave Macmillan (M.U.)(http://www.monash.edu.au/lls/llonline/writing/medicine/reflective/2.xml) KOLB D A (1984) Experiential Learning: experience as the source of learning and development New Jersey: Prentice-Hall ProDAIT http://www.prodait.org/approaches/cia/ [accesedà ¢Ã¢â€š ¬Ã‚ ¦Ãƒ ¢Ã¢â€š ¬Ã‚ ¦Ãƒ ¢Ã¢â€š ¬Ã‚ ¦.]

Impact of Exchange Rate Misalignment on Capital Inflows

Impact of Exchange Rate Misalignment on Capital Inflows EXCHANGE RATE MISALIGNMENT AND CAPITAL INFLOWS: AN ENDOGENOUS THRESHOLD ANALYSIS FOR MALAYSIA ABSTRACT This study presents an attempt to investigate the impact of exchange rate misalignment on capital inflows in Malaysia. Specifically, a precise threshold value is estimated to examine when exchange rate misalignment suppresses capital inflows. To pursue these objectives, this study relies on the endogenous threshold analysis as of Hansen (1996, 2000). Results suggest that misalignment in terms of currency overvaluation, has a negative and significant effect when overvaluation is more than 15 percent. This estimate is consistent and robust despite the changes in the choice of explanatory variables. INTRODUCTION Foreign direct investment (FDI) has served as an important engine of growth via skills and technology transfer, creation of employment opportunities and expanding the capital stock in Malaysia. Since the 1997 Asian financial crisis, Malaysia is no longer the top 10 host for FDI. In fact, the rate of growth of FDI has dramatically decrease compared to that of the early 1990s. This is partly due to reverse investment (Mat Zin, 1999) and declining dependence on FDI to finance growth. However, this may also indicates the declining competitiveness of Malaysia in attracting FDI which warrants empirical research since it would be vital to investigate which factors that contributed to the deterioration of competitiveness. Since early 1980s, real exchange rate misalignment has become a standard concept in international macroeconomic theory and policy (Razin Collins, 1997). Hence, this study focuses on exchange rate misalignment as an indicator of capital inflow competitiveness in the case of Malaysia. Malaysia provides an interesting case as it is one of the largest recipients of FDI amongst its ASEAN counterparts. Another advantage of undertaking a single country study is the ability to delineate the assumption that countries are similar in terms of social, cultural, economic and political background (Sun et al., 2002). Therefore, only relevant economic determinants are accounted for to suit the Malaysian environment. The objective of this paper is to investigate the empirical relationship between capital inflows and exchange rate misalignment. Whilst existing literature focuses on the role of exchange rate, this study takes a step further to examine the impact of exchange rate misalignment on capital inflows. Specifically, we estimate a threshold value at which misalignment begins to significantly affect capital inflows. To the best of our knowledge, no published study has attempted to estimate a threshold value for exchange rate misalignment in Malaysia. Hence, this study intends to fill this gap. Based on the endogenous autoregressive threshold (TAR) model developed by Hansen (2000), we split the sample into high and low misalignment regimes. Results suggest that exchange rate misalignment due to overvaluation is detrimental to the influx of capital inflows. The next section provides a brief overview of FDI in Malaysia followed by a brief explication of the theoretical model and review of liter ature. The fourth section spells out the method pertaining to the objective. The penultimate section provides results and discussion and the final section concludes. CAPITAL INFLOWS IN MALAYSIA: RECENT TRENDS AND INCENTIVES The essence of export oriented-growth nexus somewhat depends on the inflow of foreign capital into the country. In the past, foreign direct investment has been the one of the major conduit for technology transfer, job creation and export-led growth to this country. To pursue this line of interest, the Malaysian government has designed various policies spanning the gamut of industrial specific incentives, taxation, and intellectual property protection to infrastructure support. The company tax rate for example has been reduced from 33 percent in 1987 to 27 percent in 2007 and 26 percent in 2008. Other tax incentives such as the investment tax allowance, tax relief for companies with pioneer status or high technology industries has continued until today with more industries be given the relevant status to reap the benefits of the incentives. Most recently, the government has liberalized bumiputera equity requirements for 27 sectors to further boost competitiveness. With reference to previous information, there was a surge in foreign direct investment (FDI) into Malaysia in the late 1980s and this trend continued until the onset of the 1997 Asian financial crisis. Another acute slump in the influx of FDI occured in 2001 when the economy was in a slight recession but picked up again in 2002 thereafter. With the recent burgeoning world recession following the American sub-mortgage crisis, it is expected that FDI will contract again (IMF, 2009). To capture a more vivid impact of misalignment on capital inflows, this study employs quarterly data from Bank Negara Malaysia (BNM – the central bank of Malaysia) instead of the UNCTAD data which are annual. Foreign capital inflows or investment inflows comprises three items: (i) equity investment, (ii) loans and (iii) real estate. Investment consists of equity investment in Malaysia by non-residents, loans obtained from non-residents and purchase of real estate in Malaysia by non-residents but excludes retained earnings (Source: Bank Negara Malaysia, Glossary, Monthly Bulletin Statistics January, 2009, p. 186-187). This study resorts to a specific measure of FDI, that is, foreign investment inflows. Data starts from 1991:Q1-2008:Q3, partly dictated by availability. THEORY AND REVIEW OF LITERATURE In this study, we rely on the portfolio balance approach to model the determinants of foreign capital inflows. This model has been successfully tested by Goh (2005) for Malaysia. Branson (1968) postulates that the proportion of foreign assets (Kf) in a given stock of wealth is a function of the domestic and foreign interest rates (i and i*), the measure of exchange rate expectation or risk (e) and the stock of wealth (w) expressed as: (1)Darby et al. (1999), augment this concept of exchange rate risk (e) into exchange rate volatility and exchange rate misalignment. Since this study focuses on the role of exchange rate misalignment, we substitute e with misalignment. Expressing the above equation at level yields, (2)Focusing on Z, the literature suggests a number of variables that determines capital flows. The enigmatic relationship between FDI and exchange rate nexus has been widely examined and most of the discussions root back to the work of Kohlhagen (1977), Cushman (1985), Froot and Stein (1991), Goldberg (1993) and Darby et al. (1999). The effect of exchange rate is less straightforward (Benassy-Quere et al., 2001). The mechanisms that exchange rate affects capital inflows can also be viewed via the wealth effect channel and the relative production cost channel (Xing, 2006). A devaluation of the currency of the host country makes local cost of production lower in terms of foreign currency, hence leading to higher returns from export-oriented industries. As for the wealth effect, a devaluation makes local asset cheaper which motivates investors to acquire more. Kohlhagen (1977) static model postulates that following depreciation in host countries, MNEs will increase their production capacity. In a two period dynamic model, Cushman (1985) suggests that adjusted expected real depreciation lowers the production cost which leads to increase in FDI flows. Similarly, Goldberg (1993) illustrates how sectoral profitability, location effects, and portfolio and wealth effects are important factors that determine investment an d their links with exchange rates. In her theoretical model, the direction of investment effects triggered by exchange rate movements is ambiguous, therefore, warrants empirical research. On contrary, in an imperfect information framework, Froot and Stein (1991) show that appreciation induces wealth effect of foreign investors, thus encouraging foreign investors to acquire more local assets. Empirically, there is quite a consensus that a depreciation of the exchange rate in the host country leads to a reduction of the FDI (Klein and Rosengren, 1994; Dewenter, 1995). There is however, a dearth of studies that empirically examine the relationship between FDI and exchange rate misalignment. Empirical attempts include Benassy-Quere et al. (2001) who advocate the benefits of depreciation may be offset by excessive volatility of the exchange rate. Blonigen (1997) illustrates how currency depreciation induces foreign firm to acquire firm-specific assets when markets are segmented. Hasnat (1999) study the impact of misalignment on FDI for five developed nations on annual data ranging from 1976-1995. All of these studies use misalignment as a control variable or a counterpart for exchange rate variability and is measured by a deviation from the purchasing power parity (PPP) values. Furthermore, most of these studies are based on the experiences of industrialized economies using panel data analysis framework. In short, a prolonged misalignment may affect long term business decisions as it affects costs. If the exchange rate is overvalued relative to the e stimated equilibrium level, investors may acquire more domestic assets for future capital gains in host country currency terms (Barrell and Pain, 1996). On the other hand, persistent overvaluation may reduce cost competitiveness of production in the host country, especially for export oriented products. Other traditional determinants of FDI can be demarcated into at least two categories – micro and macro determinants. The list of micro-determinants spans from market size, growth, labour costs, host government policies, tariffs to trade barriers. The macro-determinants include market size (Chakrabarti, 2001; Farrell et al., 2004; Kravis and Lipsey; 1992), openness (Edwards, 1990; Gastanaga et al. 1998; Hausmann and Fernandez-Arias, 2000; Aseidu, 2002), rate of inflation (Bajo-Rubia and Sosvilla-Rivero, 1994; Urata and Kawai, 2000), government budget, taxes (Gastanaga et al., 1998; Wei, 2000) and infrastructure (Wheeler and Mody, 1992; Urata and Kawai, 2000). Financial deepening is also another catalyst for FDI (Borensztein et al., 1998). Liquid liability, private credit and M3 serve as proxies. Increase in money supply fuels inflation which increases the cost of production in the host country rendering a negative relationship. However, increments in money supply supported by g rowth or higher productivity indicate increase in future purchasing power which can benefit market-seeking FDI. Finally, the degree of misalignment is computed based on the difference between the actual and the hypothetical equilibrium exchange rate. Accordingly, the estimation of the hypothetical equilibrium exchange rate relies on the theory advocated by Edwards (1994). This theory postulates that the real exchange rate is a function of several fundamental variables which includes the Balassa-Samuelson effect, trade openness, net foreign assets and government spending. Details are provided in Sidek and Yusoff (2009). METHODOLOGY AND DATA The question of when does misalignment begin to significantly affect capital inflows necessitate the existence of a non-linear relationship between these two variables. Thus, if such non-linear relationship exists, then it is possible to estimate an inflexion point, or a threshold value, at which the sign of misalignment may change or become significant. In the non-linear time series modelling, the threshold autoregressive model (TAR) is more popular since it offers a relatively simple specification, estimation and interpretation compared to other non-linear models. The origins of TAR models roots back to Tong (1980) where the main idea is to approximate a general non-linear autoregressive structure by a threshold autoregession with a small number of regimes. Hansen (1996, 2000) derives the asymptotic distribution of the ordinary least squares (OLS) estimates of the endogeneous threshold parameters which is used in this study. This section explains how equation (2) is estimated to incorporate threshold effect. According to Hansen (2000), threshold estimation is the act of splitting the sample into two regimes when the threshold value is unknown. One necessary precondition is that the threshold variable must be a continuous variable. In this study, the threshold estimation is carried out by splitting the sample into high misalignment and low misalignment regime. Since misalignment is a continuous variable, TAR model would be appropriate to engender the threshold value. Formally, the two-regime threshold regression model takes the form: where is the threshold variable which is used to split the sample into two regimes, is the threshold value which is unknown and must be estimated, denotes the dependent variable (capital inflow), represents a vector of explanatory variables and is the error term assumed to be white noise and i.i.d. Note that if the threshold value is greater than the threshold variable, equation (3) is estimated and vice versa. This allows the regression parameters to change with respect to . In order to write equations (3) and (4) in a single equation, a dummy variable is used which is defined as where {.} is the indicator function, with d=1 when and d = 0, if otherwise; and set , such that (3) and where and . Equation (5) allows all the regression parameters , and to be estimated and switch between the two regimes. The least square (LS) technique is used to estimate through minimization of the sum of squared errors function. To implement this, the model is expressed in matrix notation, hence, equat ion (5) is expressed as: (6) Define, (7) as the sum of squared error function. By definition the least squares estimators which is also the MLE when with i.i.d. , jointly minimize equation (7). This minimization process requires to be restricted to a bounded set . The concentrated sum of squared errors function is written as: (8) where is the value that minimizes . As takes values that is less than n, is uniquely described as: with (9) Focusing on the objective of this section, the first step is to examine whether there exist a threshold effect in the model. This requires the examination between the linear model vis-Ã  -vis the two-regime model, equation (5). The null hypothesis of no threshold effect is tested against an alternative hypothesis where threshold effect is present. Since TAR models have a non-standard distribution, Hansen (1997, 2000) develops a standard heteroscedasticity-consistent Langrange Multiplier (LM) bootstrap method to calculate the asymptotic critical value and the p-value. The second step is to examine whether the derived threshold value is statistically significant. This is done by differencing the confidence interval region based on the likelihood ratio statistic . Based on Hansen (2000), let C represent the desired asymptotic confidence interval (in this study at 95%) and be the C-level critical value and set . Assuming homoscedasticity, as , therefore, is the asymptotic C-level confidence region for . If the homoscedasticity condition is not fulfilled, then a scale likelihood ratio statistics of the residual sum of squared errors is defined as: (10)and the adjusted confidence region becomes such that is robust whether or not the heteroscedasticity condition holds. Simulation is set at 1000 replications as suggested by Hansen (2000). Also, is not normally distributed hence, the valid asymptotic confidence intervals of the estimated threshold values in the no-rejection areas defined as , where is a given asymptotic level; and the no- rejection region of the confidence interval is . If , than the null hypothesis of cannot be rejected. In addition, to examine the possibility of a second threshold value, the same exercise is repeated. Specifically, the empirical model to be tested which is based on equation (2) is defined as follows: (11) where K is capital inflows, Mis, R and M3 denote exchange rate misalignment, interest differentials and financial deepening, and Z represents the other control variables. Table 1 summarizes the description of data, measurement and sources used in this study. Table 1: Determinants of Capital Inflows (1991Q1-2008Q3) Variable Description Measurement Source I Foreign investment Total foreign investment inflow as a percentage of GDP BNM M3 Money supply M2 as a percentage of GDP IFS D Government deficit The difference between revenue and expenditure as a percentage of GDP BNM R Interest differential The difference between Malaysia and US 3-month T-Bill rates IFS T Taxation Government corporate tax revenue as a percentage of GDP BNM LL Liquid Liability Log International liquidity: banking institution liability, line. 7b.d IFS INFRA Infrastructure Log of spending on infrastructure as a percentage of GDP BNM IFS: International Financial Statistics, IMF, UNCTAD: United Nations Conference on Trade and Development, BNM: Bank Negara Malaysia Monthly Statistical BulletinDOS: Department of Statistics, Malaysia (various issues). RESULTS AND DISCUSSION Prior to time series analysis, we test for unit roots in order to avoid spurious regression. Three versions of unit root testing, namely the ADF, PP and KPSS tests are employed to examine whether the variables are stationary on level or otherwise. Table 3 indicates that the order of integration are mixed for a majority of variables. However, this study proceeds to examine the threshold effect by including lagged variables for I(1) variables in the OLS estimation. Moreover, equation (2) derived from the theory requires estimations at level. Table 2: Unit root test ADF PP KPSS Order of Integration Level 1st Diff Level 1st Diff Level 1st Diff I -3.7029* -7.9812* -3.5286* 14.00208 0.9008* 0.2305 I(0)/I(1) M3 -1.2741 -10.0951* -1.3334 -10.4699* 1.0229* 0.3588*** I(1) D -1.6297 -19.7087* -8.8219* -27.3774* 0.3649* 0.0894 I(0)/I(1) R -4.5405* -3.8179** -2.6509 -7.0649* 0.0711 0.0471 I(0)/I(1) INFRA -2.2527 -4.5270* -3.5053* -27.7776* 0.2234* 0.0813 I(0)/I(1) LL -3.0805 -6.5500* -2.4386 -6.7355* 0.1073 0.0607 I(0)/I(1) MIS -3.8075** -9.7442* -3.8076** -9.8483* 0.0662 0.0577 I(0) Note: *, ** and *** denote significance at 1%, 5% and 10% significant level. p-values are in parentheses. For ADF and PP test the null is no unit root (H0: Variable is stationary) whilst the null for the KPSS is the existence of unit root (H0: Variable is not stationary). The baseline regression constitutes the exchange rate misalignment, interest differential and a measure of financial development, M3. We present four additional models with different variables added to the baseline regression, namely liquid liability, government budget deficit, and infrastructure for sensitivity analysis. Hansen (2000) theoretical construct allows for two threshold effects, hence, the first step is to investigate the possible existence of such an effect. Prior to that, a threshold variable needs to be selected. Since the aim of this section is to examine at what percentage exchange rate misalignment actually hurts capital inflows, the appropriate threshold variable is the exchange rate misalignment. Upon choosing the appropriate threshold variable, the next step is to observe any evidence of a threshold effect and whether there exist one or more threshold by employing the heteroscedasticity-consistent Lagrange-multiplier (LM) test for a threshold based on Hansen (1996). To test under the null hypothesis of no threshold effect, p-values are calculated using a bootstrap analog which generates the dependent variable from the distribution , where is the OLS residuals from the estimated threshold model. With 1000 bootstrap replications, the p-values for the baseline threshold models (Table 3) using misalignment strongly suggest the existence of threshold effect at 0.000. Subsequently, this suggests that there is a sample split based on the effect of exchange rate misalignment. Table 3: Threshold Effects for the baseline model Model 1 First Sample Split F-Stats 51.4045 Bootstrap P-Value 0.000 Threshold Estimates -15.0260% 95% Confidence Interval -15.446% , -9.8360% Second Sample Split F-Stats 16.2171 Bootstrap P-Value 0.2890 Note: H0: No threshold effect. The threshold is based on the minimized sum of squared residuals. This illustrates the graph of the normalized likelihood ratio sequence as a function of the threshold in exchange rate misalignment. The estimated is the value which minimizes these graphs which range at =15.02-15.44%. The dotted lines on the graphs present the 95% critical values. For example, in model 1, the asymptotic 95% confidence interval set where crosses the dotted lines. The results suggest that there is ample evidence for a two-regime specification. Also, it is worth noting that 41 of the 71 observations fall into the 95% confidence interval, hence, requires an examination of the possible existence of a second sample split. Results in Table 3, show that second sample split renders insignificant bootstrap p-value thus, indicating no further regime split. Table 4 presents the results for baseline regression. For comparison purposes, this study provides the linear OLS model without the threshold effect and a two-regime model which accommodates the threshold effect. Basically, the variables confer the correct signs in line with the prediction of the theory. Misalignment has a negative and significant effect on capital inflows in regime 2. Interest differential is expected to confer a negative effect. Results indicate that interest differentials only affects capital inflows negatively in the regime 1 but is insignificant in the regime 2. Similarly, M3 has significant effect in both regime but is positive in the regime 1 but the sign switches in regime 2. Hence, splitting the sample gives a more indepth view of the effects of these basic variables on investment inflows. To reiterate, sample splitting allows the examination of whether the significant effect is present in both regimes or otherwise. The results show that below the threshold value of 15%, exchange rate misalignment may be negative but are not statistically significant. However, above the 15% threshold level, misalignment exerts both negative and significant impact on capital inflows. A 1% increase in misalignment (overvaluation) suppresses capital inflows by approximately 1.19%. The negative effect of exchange rate misalignment on capital inflows is consistent with the findings of Hasnat (1999). Barrel and Pain (1996) argue that an apparent currency misalignment persistent over some length of time may affect investment inflows decisions. A reasonable explanation is that the relative production costs may be higher as a result of such misalignment. If the ringgit is thought to be overvalued relative to its estimated equilibrium level, then foreign production may be discouraged by the prospect of future capital loss in home currency terms. Another issue which emerges after the 1997 financial crisis is that capital inflows must be managed since reversals are likely to cause severe damage to the economy. Reinhart and Reinhart (1998) calls for greater exchange rate flexibility which is meant to introduce two-way risks, therefore, discouraging speculative capital inflows. It is, however, only possible in the context of de facto peg or a tightly managed float. Furthermore, the effectiveness of this policy depends on how much policymakers are willing to allow the exchange rate to fluctuate. A large band denotes greater flexibility but risks having large nominal appreciation which connotes possible overvaluation of the currency. The result of this study suggests that overvaluation is detrimental to capital inflows if this band exceeds 15%. Hence, policymakers should keep exchange rate fluctuations well below this 15% threshold. Table 4: Baseline regression results on the effect of misalignment on capital inflows (1991:Q1-2008:Q3). Dependent variable is capital inflows. Model 1 Linear Model Threshold Model OLS without threshold Regime 1 Â £ 15.0259% Regime 2 > 15.0259% Misalignment -0.4267** (0.2115) -0.3186 (0.2573) -1.1955** (0.5712) Interest Differential -0.0250*** (0.0131) -0.0438* (0.01533) -0.0261 (0.0193) M3 0.2964* (0.0391) 0.2644* (0.0516) -0.5560* (0.1240) Constant 3.0468* (0.2779) 2.5394* (0.2593) 6.7313* (0.6099) No. of Observations 71 42 29 R2 0.3664 0.6484 0.4218 Notes: *, ** and *** denote 1%, 5% and 10% significance respectively. Standard errors in parentheses. Interest rate differential are consistently negative and significant in all specifications and in both regimes in majority of the threshold model. This stresses the role of interest rates in attracting capital inflows into Malaysia. Although the impact may be small, it is significant and the authorities should ensure that interest rates are kept at certain levels to maintain competitiveness of Malaysia as destination for capital investment. In this paper, the estimated impact of a 1% change in interest differential is expected to subdue foreign investment by 0.04 percentage point in the first regime and 0.03 percentage point in the second regime. The proxy for financial deepening, M3 is statistically significant in all models and in both regimes. Again, this signifies the importance of financial development in attracting capital investment into Malaysia. Interestingly, M3 is positive during the periods of low misalignment regime (regime 1) but becomes negative at higher misalignment regime (regime 2). During low misalignment, a 1% increase in M3 is expected to draw in 0.3 percentage point more investment inflow into Malaysia. This shows that in the lower regime, financial depth acts as an impetus to capital inflows. However, the situation reverse with 0.6 percentage point lower investment inflows is expected with a 1% increase in misalignment in the second threshold regime. Montiel (1999) explicitly explains this phenomenon where capital inflows increase reserves which then prompt an increase in the monetary base, M2 and M3. Such increases fuels further increments in domestic demand leading to real appreciation. Thus, any overvaluation of the currency may eventually have negative ramifications on capital inflows. Sensitivity analysis To check for the sensitivity of the estimated threshold value, Table 6 -7 and Figure 3 represents four other models which use different variables in addition to the baseline regression. The addition of taxes yields insignificant results without drastically changing the threshold value. Other additional variables such as government budget deficit and liquid liability are only significant in one of the two regimes . With the inclusion of additional variables, the estimated magnitude of each regressors differ slightly but maintains the same sign and significance level. For example a 1% increase in misalignment (overvaluation) suppresses capital inflows by 1.11-1.55 percentage point. The estimated impact of a 1% change in interest differential is expected to deter foreign investment by 0.04-0.05 percentage point in the first regime and 0.02-0.06 percentage point in the second regime. Similarly, during low misalignment, a 1% increase in M3 is expected to draw in 0.2-0.3 percentage point m ore investment inflow into Malaysia. An estimated 0.49-0.67 percentage point lower investment inflows is expected with a 1% increase in M3 in the second threshold regime. In view of the results, it seems evident that the exchange rate policy has important effect in attracting foreign capital inflows into Malaysia. Specifically, misalignment in terms of overvaluation should be kept lower than 15 percent to ensure that capital inflows remained unhurt. Table 5: Sensitivity Analysis: Threshold Effects Model 2 Model 3 Model 4 Model 5 First Sample Split F-Stats 71.1442 45.9364 53.3722 53.3722 Bootstrap P-Value 0.000 0.000 0.000 0.000 Threshold Estimates -15.4461% -15.0260% -15.0260% -15.0260% 95% Confidence Interval -15.446%, -15.025% -15.446%, -9.836% -15.446%, -0.0984% -15.446%, -0.0984% Second Sample Split F-Stats 16.4917 19.7585 22.9710 22.9710 Bootstrap P-Value 0.5310 0.3800 0.2420 0.2420 Note: H0: No threshold effect. The threshold is based on the minimized sum of squared residuals Table 6: Sensitivity Analysis for threshold estimates (1991:Q1-2008:Q3). Model 2 Linear Model Threshold Model OLS without threshold Regime 1 Â £ 15.4461% Regime 2 > 15.4461% Misalignment -0.4278*** (0.2216) -0.3497 (0.4143) -1.5593* (0.3135) Interest Differential -0.0250*** (0.0134) -0.0462* (0.0153) -0.0599* (0.0131) M3 0.2966* (0.0414) 0.2732* (0.0488) -0.5609* (0.0744) Liquid Liability -0.0029 (0.1709) -0.0634 (0.1932) 1.1843* (0.2615) Constant 2.9780* (0.2713) 2.5259* (0.2593) 6.1799* (0.3135) No. of Observations 71 41 30 R2 0.3842 0.6503 0.5986 Model 3 Linear Model Threshold Model OLS without threshold Regime 1 Â £ 15.0260% Regime 2 > 15.0260% Misalignment -0.4472** (0.2038) -0.3800 (0.2460) -1.1171*** (0.6229) Interest Differential -0.0254* (0.0126) -0.0505* (0.0140) -0.0237 (0.0221) M3 0.2844* (7.4922) 0.2521* (0.0472) -0.5391* (0.1477) Deficit -0.7655* (0.3059) -0.7380* (0.3099) -0.1841 (0.7174) Constant 3.0308* (0.2674) 2.5835* (0.2445) 6.6452* (0.7337) No. of Observations 71 42 29 R2 0.4285 0.6829 0.4230 Model 4 Linear Model Threshold Model OL S without threshold Regime 1 Â £ 15.0260% Regime 2 > 15.0260% Misalignment -0.2852 (0.2181) -0.2582 (0.2720) 1.2490** (0.5612) Interest Differential -0.0275** (0.0128) -0.0419* (0.0165) -0.0311 (0.0204) M3 0.3208* (0.0401) 0.2796* (0.0583) -0.5489* (0.1245) Tax 2.1899** (1.0761) 0.1283 (0.1457) 0.1260 (0.1720) Constant 3.0274* (0.4383) 2.2463* (0.4806) 6.5027* (0.7227) No. of Observations 71 42 29 R2 0.3665 0.6516 0.4300 Model 5 Linear Model Threshold Model OLS without threshold Regime 1 Â £ 15.0260% Regime 2 > 15.0260% Misalignment -0.3780*** (0.1977) -0.4495*** (0.2602) -1.3190** (0.6059) Interest Differential -0.0203 (0.0123) -0.0433* (0.0152) -0.0308 (0.0212) M3 0.2941* (0.0365) 0.2388* (0.0479) -0.6093* (0.1406) Infrastructure 3.0729* (3.3373) 0.0474** (0.0228) -0.0382 (0.0392) Constant 3.0709* (0.2569) 2.5698* (0.2346) 7.0433* (0.7173) No. of Observations 71 42 29 R2 0.4091 0.6815 0.4384 Notes: *, ** and *** denote 1%, 5% and 10% significance respectively. Standard errors in parentheses. CONCLUSION The objective of this chapter is to examine the impact of exchange rate misalignment on capital inflows. Results provide evidences of the negative impact of misalignment on capital inflows. To reiterate, overvaluation of the ringgit signals that Malaysia is less competitive vis-Ã  -vis other countries. In addition, this paper also estimates a specific threshold value; that is the degree of misalignment after which it begins to hurt capital inflows. By employing a recent technique by Hansen (1996, 2000), this study splits the sample into high misalignment and low misalignment regimes. This study shows that misalignments hurt capital inflows in the high misalignment regime or when misalignment is greater than 15 percent. This study also confirms the work of Goh (2005) who suggests that the portfolio balance model can capture the determinants of capital inflows in Malaysia. In particular, the results suggest that interest differential is an important determinant albeit, small, hence, p olicies should be direc Impact of Exchange Rate Misalignment on Capital Inflows Impact of Exchange Rate Misalignment on Capital Inflows EXCHANGE RATE MISALIGNMENT AND CAPITAL INFLOWS: AN ENDOGENOUS THRESHOLD ANALYSIS FOR MALAYSIA ABSTRACT This study presents an attempt to investigate the impact of exchange rate misalignment on capital inflows in Malaysia. Specifically, a precise threshold value is estimated to examine when exchange rate misalignment suppresses capital inflows. To pursue these objectives, this study relies on the endogenous threshold analysis as of Hansen (1996, 2000). Results suggest that misalignment in terms of currency overvaluation, has a negative and significant effect when overvaluation is more than 15 percent. This estimate is consistent and robust despite the changes in the choice of explanatory variables. INTRODUCTION Foreign direct investment (FDI) has served as an important engine of growth via skills and technology transfer, creation of employment opportunities and expanding the capital stock in Malaysia. Since the 1997 Asian financial crisis, Malaysia is no longer the top 10 host for FDI. In fact, the rate of growth of FDI has dramatically decrease compared to that of the early 1990s. This is partly due to reverse investment (Mat Zin, 1999) and declining dependence on FDI to finance growth. However, this may also indicates the declining competitiveness of Malaysia in attracting FDI which warrants empirical research since it would be vital to investigate which factors that contributed to the deterioration of competitiveness. Since early 1980s, real exchange rate misalignment has become a standard concept in international macroeconomic theory and policy (Razin Collins, 1997). Hence, this study focuses on exchange rate misalignment as an indicator of capital inflow competitiveness in the case of Malaysia. Malaysia provides an interesting case as it is one of the largest recipients of FDI amongst its ASEAN counterparts. Another advantage of undertaking a single country study is the ability to delineate the assumption that countries are similar in terms of social, cultural, economic and political background (Sun et al., 2002). Therefore, only relevant economic determinants are accounted for to suit the Malaysian environment. The objective of this paper is to investigate the empirical relationship between capital inflows and exchange rate misalignment. Whilst existing literature focuses on the role of exchange rate, this study takes a step further to examine the impact of exchange rate misalignment on capital inflows. Specifically, we estimate a threshold value at which misalignment begins to significantly affect capital inflows. To the best of our knowledge, no published study has attempted to estimate a threshold value for exchange rate misalignment in Malaysia. Hence, this study intends to fill this gap. Based on the endogenous autoregressive threshold (TAR) model developed by Hansen (2000), we split the sample into high and low misalignment regimes. Results suggest that exchange rate misalignment due to overvaluation is detrimental to the influx of capital inflows. The next section provides a brief overview of FDI in Malaysia followed by a brief explication of the theoretical model and review of liter ature. The fourth section spells out the method pertaining to the objective. The penultimate section provides results and discussion and the final section concludes. CAPITAL INFLOWS IN MALAYSIA: RECENT TRENDS AND INCENTIVES The essence of export oriented-growth nexus somewhat depends on the inflow of foreign capital into the country. In the past, foreign direct investment has been the one of the major conduit for technology transfer, job creation and export-led growth to this country. To pursue this line of interest, the Malaysian government has designed various policies spanning the gamut of industrial specific incentives, taxation, and intellectual property protection to infrastructure support. The company tax rate for example has been reduced from 33 percent in 1987 to 27 percent in 2007 and 26 percent in 2008. Other tax incentives such as the investment tax allowance, tax relief for companies with pioneer status or high technology industries has continued until today with more industries be given the relevant status to reap the benefits of the incentives. Most recently, the government has liberalized bumiputera equity requirements for 27 sectors to further boost competitiveness. With reference to previous information, there was a surge in foreign direct investment (FDI) into Malaysia in the late 1980s and this trend continued until the onset of the 1997 Asian financial crisis. Another acute slump in the influx of FDI occured in 2001 when the economy was in a slight recession but picked up again in 2002 thereafter. With the recent burgeoning world recession following the American sub-mortgage crisis, it is expected that FDI will contract again (IMF, 2009). To capture a more vivid impact of misalignment on capital inflows, this study employs quarterly data from Bank Negara Malaysia (BNM – the central bank of Malaysia) instead of the UNCTAD data which are annual. Foreign capital inflows or investment inflows comprises three items: (i) equity investment, (ii) loans and (iii) real estate. Investment consists of equity investment in Malaysia by non-residents, loans obtained from non-residents and purchase of real estate in Malaysia by non-residents but excludes retained earnings (Source: Bank Negara Malaysia, Glossary, Monthly Bulletin Statistics January, 2009, p. 186-187). This study resorts to a specific measure of FDI, that is, foreign investment inflows. Data starts from 1991:Q1-2008:Q3, partly dictated by availability. THEORY AND REVIEW OF LITERATURE In this study, we rely on the portfolio balance approach to model the determinants of foreign capital inflows. This model has been successfully tested by Goh (2005) for Malaysia. Branson (1968) postulates that the proportion of foreign assets (Kf) in a given stock of wealth is a function of the domestic and foreign interest rates (i and i*), the measure of exchange rate expectation or risk (e) and the stock of wealth (w) expressed as: (1)Darby et al. (1999), augment this concept of exchange rate risk (e) into exchange rate volatility and exchange rate misalignment. Since this study focuses on the role of exchange rate misalignment, we substitute e with misalignment. Expressing the above equation at level yields, (2)Focusing on Z, the literature suggests a number of variables that determines capital flows. The enigmatic relationship between FDI and exchange rate nexus has been widely examined and most of the discussions root back to the work of Kohlhagen (1977), Cushman (1985), Froot and Stein (1991), Goldberg (1993) and Darby et al. (1999). The effect of exchange rate is less straightforward (Benassy-Quere et al., 2001). The mechanisms that exchange rate affects capital inflows can also be viewed via the wealth effect channel and the relative production cost channel (Xing, 2006). A devaluation of the currency of the host country makes local cost of production lower in terms of foreign currency, hence leading to higher returns from export-oriented industries. As for the wealth effect, a devaluation makes local asset cheaper which motivates investors to acquire more. Kohlhagen (1977) static model postulates that following depreciation in host countries, MNEs will increase their production capacity. In a two period dynamic model, Cushman (1985) suggests that adjusted expected real depreciation lowers the production cost which leads to increase in FDI flows. Similarly, Goldberg (1993) illustrates how sectoral profitability, location effects, and portfolio and wealth effects are important factors that determine investment an d their links with exchange rates. In her theoretical model, the direction of investment effects triggered by exchange rate movements is ambiguous, therefore, warrants empirical research. On contrary, in an imperfect information framework, Froot and Stein (1991) show that appreciation induces wealth effect of foreign investors, thus encouraging foreign investors to acquire more local assets. Empirically, there is quite a consensus that a depreciation of the exchange rate in the host country leads to a reduction of the FDI (Klein and Rosengren, 1994; Dewenter, 1995). There is however, a dearth of studies that empirically examine the relationship between FDI and exchange rate misalignment. Empirical attempts include Benassy-Quere et al. (2001) who advocate the benefits of depreciation may be offset by excessive volatility of the exchange rate. Blonigen (1997) illustrates how currency depreciation induces foreign firm to acquire firm-specific assets when markets are segmented. Hasnat (1999) study the impact of misalignment on FDI for five developed nations on annual data ranging from 1976-1995. All of these studies use misalignment as a control variable or a counterpart for exchange rate variability and is measured by a deviation from the purchasing power parity (PPP) values. Furthermore, most of these studies are based on the experiences of industrialized economies using panel data analysis framework. In short, a prolonged misalignment may affect long term business decisions as it affects costs. If the exchange rate is overvalued relative to the e stimated equilibrium level, investors may acquire more domestic assets for future capital gains in host country currency terms (Barrell and Pain, 1996). On the other hand, persistent overvaluation may reduce cost competitiveness of production in the host country, especially for export oriented products. Other traditional determinants of FDI can be demarcated into at least two categories – micro and macro determinants. The list of micro-determinants spans from market size, growth, labour costs, host government policies, tariffs to trade barriers. The macro-determinants include market size (Chakrabarti, 2001; Farrell et al., 2004; Kravis and Lipsey; 1992), openness (Edwards, 1990; Gastanaga et al. 1998; Hausmann and Fernandez-Arias, 2000; Aseidu, 2002), rate of inflation (Bajo-Rubia and Sosvilla-Rivero, 1994; Urata and Kawai, 2000), government budget, taxes (Gastanaga et al., 1998; Wei, 2000) and infrastructure (Wheeler and Mody, 1992; Urata and Kawai, 2000). Financial deepening is also another catalyst for FDI (Borensztein et al., 1998). Liquid liability, private credit and M3 serve as proxies. Increase in money supply fuels inflation which increases the cost of production in the host country rendering a negative relationship. However, increments in money supply supported by g rowth or higher productivity indicate increase in future purchasing power which can benefit market-seeking FDI. Finally, the degree of misalignment is computed based on the difference between the actual and the hypothetical equilibrium exchange rate. Accordingly, the estimation of the hypothetical equilibrium exchange rate relies on the theory advocated by Edwards (1994). This theory postulates that the real exchange rate is a function of several fundamental variables which includes the Balassa-Samuelson effect, trade openness, net foreign assets and government spending. Details are provided in Sidek and Yusoff (2009). METHODOLOGY AND DATA The question of when does misalignment begin to significantly affect capital inflows necessitate the existence of a non-linear relationship between these two variables. Thus, if such non-linear relationship exists, then it is possible to estimate an inflexion point, or a threshold value, at which the sign of misalignment may change or become significant. In the non-linear time series modelling, the threshold autoregressive model (TAR) is more popular since it offers a relatively simple specification, estimation and interpretation compared to other non-linear models. The origins of TAR models roots back to Tong (1980) where the main idea is to approximate a general non-linear autoregressive structure by a threshold autoregession with a small number of regimes. Hansen (1996, 2000) derives the asymptotic distribution of the ordinary least squares (OLS) estimates of the endogeneous threshold parameters which is used in this study. This section explains how equation (2) is estimated to incorporate threshold effect. According to Hansen (2000), threshold estimation is the act of splitting the sample into two regimes when the threshold value is unknown. One necessary precondition is that the threshold variable must be a continuous variable. In this study, the threshold estimation is carried out by splitting the sample into high misalignment and low misalignment regime. Since misalignment is a continuous variable, TAR model would be appropriate to engender the threshold value. Formally, the two-regime threshold regression model takes the form: where is the threshold variable which is used to split the sample into two regimes, is the threshold value which is unknown and must be estimated, denotes the dependent variable (capital inflow), represents a vector of explanatory variables and is the error term assumed to be white noise and i.i.d. Note that if the threshold value is greater than the threshold variable, equation (3) is estimated and vice versa. This allows the regression parameters to change with respect to . In order to write equations (3) and (4) in a single equation, a dummy variable is used which is defined as where {.} is the indicator function, with d=1 when and d = 0, if otherwise; and set , such that (3) and where and . Equation (5) allows all the regression parameters , and to be estimated and switch between the two regimes. The least square (LS) technique is used to estimate through minimization of the sum of squared errors function. To implement this, the model is expressed in matrix notation, hence, equat ion (5) is expressed as: (6) Define, (7) as the sum of squared error function. By definition the least squares estimators which is also the MLE when with i.i.d. , jointly minimize equation (7). This minimization process requires to be restricted to a bounded set . The concentrated sum of squared errors function is written as: (8) where is the value that minimizes . As takes values that is less than n, is uniquely described as: with (9) Focusing on the objective of this section, the first step is to examine whether there exist a threshold effect in the model. This requires the examination between the linear model vis-Ã  -vis the two-regime model, equation (5). The null hypothesis of no threshold effect is tested against an alternative hypothesis where threshold effect is present. Since TAR models have a non-standard distribution, Hansen (1997, 2000) develops a standard heteroscedasticity-consistent Langrange Multiplier (LM) bootstrap method to calculate the asymptotic critical value and the p-value. The second step is to examine whether the derived threshold value is statistically significant. This is done by differencing the confidence interval region based on the likelihood ratio statistic . Based on Hansen (2000), let C represent the desired asymptotic confidence interval (in this study at 95%) and be the C-level critical value and set . Assuming homoscedasticity, as , therefore, is the asymptotic C-level confidence region for . If the homoscedasticity condition is not fulfilled, then a scale likelihood ratio statistics of the residual sum of squared errors is defined as: (10)and the adjusted confidence region becomes such that is robust whether or not the heteroscedasticity condition holds. Simulation is set at 1000 replications as suggested by Hansen (2000). Also, is not normally distributed hence, the valid asymptotic confidence intervals of the estimated threshold values in the no-rejection areas defined as , where is a given asymptotic level; and the no- rejection region of the confidence interval is . If , than the null hypothesis of cannot be rejected. In addition, to examine the possibility of a second threshold value, the same exercise is repeated. Specifically, the empirical model to be tested which is based on equation (2) is defined as follows: (11) where K is capital inflows, Mis, R and M3 denote exchange rate misalignment, interest differentials and financial deepening, and Z represents the other control variables. Table 1 summarizes the description of data, measurement and sources used in this study. Table 1: Determinants of Capital Inflows (1991Q1-2008Q3) Variable Description Measurement Source I Foreign investment Total foreign investment inflow as a percentage of GDP BNM M3 Money supply M2 as a percentage of GDP IFS D Government deficit The difference between revenue and expenditure as a percentage of GDP BNM R Interest differential The difference between Malaysia and US 3-month T-Bill rates IFS T Taxation Government corporate tax revenue as a percentage of GDP BNM LL Liquid Liability Log International liquidity: banking institution liability, line. 7b.d IFS INFRA Infrastructure Log of spending on infrastructure as a percentage of GDP BNM IFS: International Financial Statistics, IMF, UNCTAD: United Nations Conference on Trade and Development, BNM: Bank Negara Malaysia Monthly Statistical BulletinDOS: Department of Statistics, Malaysia (various issues). RESULTS AND DISCUSSION Prior to time series analysis, we test for unit roots in order to avoid spurious regression. Three versions of unit root testing, namely the ADF, PP and KPSS tests are employed to examine whether the variables are stationary on level or otherwise. Table 3 indicates that the order of integration are mixed for a majority of variables. However, this study proceeds to examine the threshold effect by including lagged variables for I(1) variables in the OLS estimation. Moreover, equation (2) derived from the theory requires estimations at level. Table 2: Unit root test ADF PP KPSS Order of Integration Level 1st Diff Level 1st Diff Level 1st Diff I -3.7029* -7.9812* -3.5286* 14.00208 0.9008* 0.2305 I(0)/I(1) M3 -1.2741 -10.0951* -1.3334 -10.4699* 1.0229* 0.3588*** I(1) D -1.6297 -19.7087* -8.8219* -27.3774* 0.3649* 0.0894 I(0)/I(1) R -4.5405* -3.8179** -2.6509 -7.0649* 0.0711 0.0471 I(0)/I(1) INFRA -2.2527 -4.5270* -3.5053* -27.7776* 0.2234* 0.0813 I(0)/I(1) LL -3.0805 -6.5500* -2.4386 -6.7355* 0.1073 0.0607 I(0)/I(1) MIS -3.8075** -9.7442* -3.8076** -9.8483* 0.0662 0.0577 I(0) Note: *, ** and *** denote significance at 1%, 5% and 10% significant level. p-values are in parentheses. For ADF and PP test the null is no unit root (H0: Variable is stationary) whilst the null for the KPSS is the existence of unit root (H0: Variable is not stationary). The baseline regression constitutes the exchange rate misalignment, interest differential and a measure of financial development, M3. We present four additional models with different variables added to the baseline regression, namely liquid liability, government budget deficit, and infrastructure for sensitivity analysis. Hansen (2000) theoretical construct allows for two threshold effects, hence, the first step is to investigate the possible existence of such an effect. Prior to that, a threshold variable needs to be selected. Since the aim of this section is to examine at what percentage exchange rate misalignment actually hurts capital inflows, the appropriate threshold variable is the exchange rate misalignment. Upon choosing the appropriate threshold variable, the next step is to observe any evidence of a threshold effect and whether there exist one or more threshold by employing the heteroscedasticity-consistent Lagrange-multiplier (LM) test for a threshold based on Hansen (1996). To test under the null hypothesis of no threshold effect, p-values are calculated using a bootstrap analog which generates the dependent variable from the distribution , where is the OLS residuals from the estimated threshold model. With 1000 bootstrap replications, the p-values for the baseline threshold models (Table 3) using misalignment strongly suggest the existence of threshold effect at 0.000. Subsequently, this suggests that there is a sample split based on the effect of exchange rate misalignment. Table 3: Threshold Effects for the baseline model Model 1 First Sample Split F-Stats 51.4045 Bootstrap P-Value 0.000 Threshold Estimates -15.0260% 95% Confidence Interval -15.446% , -9.8360% Second Sample Split F-Stats 16.2171 Bootstrap P-Value 0.2890 Note: H0: No threshold effect. The threshold is based on the minimized sum of squared residuals. This illustrates the graph of the normalized likelihood ratio sequence as a function of the threshold in exchange rate misalignment. The estimated is the value which minimizes these graphs which range at =15.02-15.44%. The dotted lines on the graphs present the 95% critical values. For example, in model 1, the asymptotic 95% confidence interval set where crosses the dotted lines. The results suggest that there is ample evidence for a two-regime specification. Also, it is worth noting that 41 of the 71 observations fall into the 95% confidence interval, hence, requires an examination of the possible existence of a second sample split. Results in Table 3, show that second sample split renders insignificant bootstrap p-value thus, indicating no further regime split. Table 4 presents the results for baseline regression. For comparison purposes, this study provides the linear OLS model without the threshold effect and a two-regime model which accommodates the threshold effect. Basically, the variables confer the correct signs in line with the prediction of the theory. Misalignment has a negative and significant effect on capital inflows in regime 2. Interest differential is expected to confer a negative effect. Results indicate that interest differentials only affects capital inflows negatively in the regime 1 but is insignificant in the regime 2. Similarly, M3 has significant effect in both regime but is positive in the regime 1 but the sign switches in regime 2. Hence, splitting the sample gives a more indepth view of the effects of these basic variables on investment inflows. To reiterate, sample splitting allows the examination of whether the significant effect is present in both regimes or otherwise. The results show that below the threshold value of 15%, exchange rate misalignment may be negative but are not statistically significant. However, above the 15% threshold level, misalignment exerts both negative and significant impact on capital inflows. A 1% increase in misalignment (overvaluation) suppresses capital inflows by approximately 1.19%. The negative effect of exchange rate misalignment on capital inflows is consistent with the findings of Hasnat (1999). Barrel and Pain (1996) argue that an apparent currency misalignment persistent over some length of time may affect investment inflows decisions. A reasonable explanation is that the relative production costs may be higher as a result of such misalignment. If the ringgit is thought to be overvalued relative to its estimated equilibrium level, then foreign production may be discouraged by the prospect of future capital loss in home currency terms. Another issue which emerges after the 1997 financial crisis is that capital inflows must be managed since reversals are likely to cause severe damage to the economy. Reinhart and Reinhart (1998) calls for greater exchange rate flexibility which is meant to introduce two-way risks, therefore, discouraging speculative capital inflows. It is, however, only possible in the context of de facto peg or a tightly managed float. Furthermore, the effectiveness of this policy depends on how much policymakers are willing to allow the exchange rate to fluctuate. A large band denotes greater flexibility but risks having large nominal appreciation which connotes possible overvaluation of the currency. The result of this study suggests that overvaluation is detrimental to capital inflows if this band exceeds 15%. Hence, policymakers should keep exchange rate fluctuations well below this 15% threshold. Table 4: Baseline regression results on the effect of misalignment on capital inflows (1991:Q1-2008:Q3). Dependent variable is capital inflows. Model 1 Linear Model Threshold Model OLS without threshold Regime 1 Â £ 15.0259% Regime 2 > 15.0259% Misalignment -0.4267** (0.2115) -0.3186 (0.2573) -1.1955** (0.5712) Interest Differential -0.0250*** (0.0131) -0.0438* (0.01533) -0.0261 (0.0193) M3 0.2964* (0.0391) 0.2644* (0.0516) -0.5560* (0.1240) Constant 3.0468* (0.2779) 2.5394* (0.2593) 6.7313* (0.6099) No. of Observations 71 42 29 R2 0.3664 0.6484 0.4218 Notes: *, ** and *** denote 1%, 5% and 10% significance respectively. Standard errors in parentheses. Interest rate differential are consistently negative and significant in all specifications and in both regimes in majority of the threshold model. This stresses the role of interest rates in attracting capital inflows into Malaysia. Although the impact may be small, it is significant and the authorities should ensure that interest rates are kept at certain levels to maintain competitiveness of Malaysia as destination for capital investment. In this paper, the estimated impact of a 1% change in interest differential is expected to subdue foreign investment by 0.04 percentage point in the first regime and 0.03 percentage point in the second regime. The proxy for financial deepening, M3 is statistically significant in all models and in both regimes. Again, this signifies the importance of financial development in attracting capital investment into Malaysia. Interestingly, M3 is positive during the periods of low misalignment regime (regime 1) but becomes negative at higher misalignment regime (regime 2). During low misalignment, a 1% increase in M3 is expected to draw in 0.3 percentage point more investment inflow into Malaysia. This shows that in the lower regime, financial depth acts as an impetus to capital inflows. However, the situation reverse with 0.6 percentage point lower investment inflows is expected with a 1% increase in misalignment in the second threshold regime. Montiel (1999) explicitly explains this phenomenon where capital inflows increase reserves which then prompt an increase in the monetary base, M2 and M3. Such increases fuels further increments in domestic demand leading to real appreciation. Thus, any overvaluation of the currency may eventually have negative ramifications on capital inflows. Sensitivity analysis To check for the sensitivity of the estimated threshold value, Table 6 -7 and Figure 3 represents four other models which use different variables in addition to the baseline regression. The addition of taxes yields insignificant results without drastically changing the threshold value. Other additional variables such as government budget deficit and liquid liability are only significant in one of the two regimes . With the inclusion of additional variables, the estimated magnitude of each regressors differ slightly but maintains the same sign and significance level. For example a 1% increase in misalignment (overvaluation) suppresses capital inflows by 1.11-1.55 percentage point. The estimated impact of a 1% change in interest differential is expected to deter foreign investment by 0.04-0.05 percentage point in the first regime and 0.02-0.06 percentage point in the second regime. Similarly, during low misalignment, a 1% increase in M3 is expected to draw in 0.2-0.3 percentage point m ore investment inflow into Malaysia. An estimated 0.49-0.67 percentage point lower investment inflows is expected with a 1% increase in M3 in the second threshold regime. In view of the results, it seems evident that the exchange rate policy has important effect in attracting foreign capital inflows into Malaysia. Specifically, misalignment in terms of overvaluation should be kept lower than 15 percent to ensure that capital inflows remained unhurt. Table 5: Sensitivity Analysis: Threshold Effects Model 2 Model 3 Model 4 Model 5 First Sample Split F-Stats 71.1442 45.9364 53.3722 53.3722 Bootstrap P-Value 0.000 0.000 0.000 0.000 Threshold Estimates -15.4461% -15.0260% -15.0260% -15.0260% 95% Confidence Interval -15.446%, -15.025% -15.446%, -9.836% -15.446%, -0.0984% -15.446%, -0.0984% Second Sample Split F-Stats 16.4917 19.7585 22.9710 22.9710 Bootstrap P-Value 0.5310 0.3800 0.2420 0.2420 Note: H0: No threshold effect. The threshold is based on the minimized sum of squared residuals Table 6: Sensitivity Analysis for threshold estimates (1991:Q1-2008:Q3). Model 2 Linear Model Threshold Model OLS without threshold Regime 1 Â £ 15.4461% Regime 2 > 15.4461% Misalignment -0.4278*** (0.2216) -0.3497 (0.4143) -1.5593* (0.3135) Interest Differential -0.0250*** (0.0134) -0.0462* (0.0153) -0.0599* (0.0131) M3 0.2966* (0.0414) 0.2732* (0.0488) -0.5609* (0.0744) Liquid Liability -0.0029 (0.1709) -0.0634 (0.1932) 1.1843* (0.2615) Constant 2.9780* (0.2713) 2.5259* (0.2593) 6.1799* (0.3135) No. of Observations 71 41 30 R2 0.3842 0.6503 0.5986 Model 3 Linear Model Threshold Model OLS without threshold Regime 1 Â £ 15.0260% Regime 2 > 15.0260% Misalignment -0.4472** (0.2038) -0.3800 (0.2460) -1.1171*** (0.6229) Interest Differential -0.0254* (0.0126) -0.0505* (0.0140) -0.0237 (0.0221) M3 0.2844* (7.4922) 0.2521* (0.0472) -0.5391* (0.1477) Deficit -0.7655* (0.3059) -0.7380* (0.3099) -0.1841 (0.7174) Constant 3.0308* (0.2674) 2.5835* (0.2445) 6.6452* (0.7337) No. of Observations 71 42 29 R2 0.4285 0.6829 0.4230 Model 4 Linear Model Threshold Model OL S without threshold Regime 1 Â £ 15.0260% Regime 2 > 15.0260% Misalignment -0.2852 (0.2181) -0.2582 (0.2720) 1.2490** (0.5612) Interest Differential -0.0275** (0.0128) -0.0419* (0.0165) -0.0311 (0.0204) M3 0.3208* (0.0401) 0.2796* (0.0583) -0.5489* (0.1245) Tax 2.1899** (1.0761) 0.1283 (0.1457) 0.1260 (0.1720) Constant 3.0274* (0.4383) 2.2463* (0.4806) 6.5027* (0.7227) No. of Observations 71 42 29 R2 0.3665 0.6516 0.4300 Model 5 Linear Model Threshold Model OLS without threshold Regime 1 Â £ 15.0260% Regime 2 > 15.0260% Misalignment -0.3780*** (0.1977) -0.4495*** (0.2602) -1.3190** (0.6059) Interest Differential -0.0203 (0.0123) -0.0433* (0.0152) -0.0308 (0.0212) M3 0.2941* (0.0365) 0.2388* (0.0479) -0.6093* (0.1406) Infrastructure 3.0729* (3.3373) 0.0474** (0.0228) -0.0382 (0.0392) Constant 3.0709* (0.2569) 2.5698* (0.2346) 7.0433* (0.7173) No. of Observations 71 42 29 R2 0.4091 0.6815 0.4384 Notes: *, ** and *** denote 1%, 5% and 10% significance respectively. Standard errors in parentheses. CONCLUSION The objective of this chapter is to examine the impact of exchange rate misalignment on capital inflows. Results provide evidences of the negative impact of misalignment on capital inflows. To reiterate, overvaluation of the ringgit signals that Malaysia is less competitive vis-Ã  -vis other countries. In addition, this paper also estimates a specific threshold value; that is the degree of misalignment after which it begins to hurt capital inflows. By employing a recent technique by Hansen (1996, 2000), this study splits the sample into high misalignment and low misalignment regimes. This study shows that misalignments hurt capital inflows in the high misalignment regime or when misalignment is greater than 15 percent. This study also confirms the work of Goh (2005) who suggests that the portfolio balance model can capture the determinants of capital inflows in Malaysia. In particular, the results suggest that interest differential is an important determinant albeit, small, hence, p olicies should be direc