Introduction
The credit boom led to widespread prosperity. The credit crunch is also not far behind in demonstrating how globalised and hence interdependent economies are. Since the 1990’s, and especially the last decade, foreign investments, debt instruments and credit fuelled expansion has been the norm for most economies. However, the credit crunch faced by organisations such as Lehman Brothers has led to a global meltdown. What started as sub-prime mortgage crisis has led to the credit traps drying up for businesses and also for individuals whose credit worthiness a short time back was beyond doubt.
Some economies have been the worst hit. Iceland is the first country where the government has collapsed and has been forced to resign. The present government is in a caretaker mode with the opposition having unclear answers on how to cope with the recession. Managing inflation during recession is a difficult task (Ethan S. Harris, 193). Ireland has the distinction of being the first country which is part of the euro currency zone that has gone into recession. It may not be the last, however, with Britain already in recession, and the slowdown has severely affected Spain, Portugal, Italy, Greece, Germany and the United States. In fact the IMF predicts that Britain could face the worst recession amongst the most industrialist countries.
The impact of the Irish recession and strategies being adopted by companies to deal with the situation is my focus of research. Ireland is an intriguing case as it was one of the poorest European nations and has gone on to become one of the wealthiest in a matter of two decades. Ireland has experienced double digit growth in the recent past whereas most economies in the recent good times have also struggled to get half of its growth rate. It is important to understand the growth of Ireland, the so-called ‘Celtic tiger’, in the last two decades, the cause and creation of circumstances leading to the credit crunch, and the combined effect of these factors on the Irish economy. This understanding will help drive efforts to understand the manner in which companies are dealing with the recession. Inputs from background research will help identify the research objectives and questions that will be asked to executives of Irish companies.
The Irish economy was an inward looking economy till 1950s (John Bradley 3-46). This changed with Ireland being more outward post this period. This did not immediately lead Ireland to become a big export hub; there was a moderate increase in exports. However, the real benefits arose from the investments that were made in the economy. Ireland’s closeness with Europe in the 1960s led to a period of economic boom till the 1980s. But the recession in 1983 again forced a rethink in Irish business and government strategy. The only positive factor for the Irish economy was arguably the re-emphasis on the European integration of markets.
Even though there was political integration, a lot of non tariff barriers led to limited cross border trade and partnerships. The manufacturing sector did share some commonality with trade developing to a certain extent, but other sectors of the economy were yet to start sharing the benefits of European Union membership. A new legislative process was needed to ensure that countries within the European Union (EU) had similar policies to encourage trade, remove protection from key sectors and allow free movement of labour.
In order to get ready for trans-border EU trade, Irish companies and key sectors were asked to assess their readiness for increased competition. It is important to understand how these Irish companies react to increased competition to their services and how they managed to contribute to opportunities across the EU. In general, Irish companies benefited for the following reasons: high educational standards, technology intensive investments, lower prices, and high quality of manufacturing. The bigger EU member states also had to forego a lot of their protectionist policies. Customers and businesses chose to shift to competitors that offered better quality at a cheaper price, and Irish and other nations’ companies took advantage of this moment. Irish companies also benefited from the ready availability of credit both within the domestic and the EU market, and have benefited from a reduced transaction cost, the negation of foreign exchange risk while dealing within the EU internal market, price transparency for customers and a stringent overview of public finances owing to the guidelines of the EU.
Successive pro-business governments in Ireland have also continued to attract foreign direct investment. The policies of Ireland have been fairly predictable, but by being predictable, the Irish have also demonstrated the vision, methodology and commitment that investors seek for reassurance. The country was seen as a base for starting business in Europe. It is the country within the EU with the highest percentage of English-speaking citizens. The high level of education also meant that highly skilled labour was available for companies to setup their European bases in Ireland. The largest investor in Ireland has traditionally been the United States, mainly because of historic and ancestral loyalties; but the second largest has been Germany, which has no significant historic or ancestral links with Eire. The lower corporate tax rate in Ireland has also lured companies. A special development agency was setup in Ireland to help the government attract foreign investment, and the agency worked closely with the government in helping it formulating strategies for continued industry growth.
The Celtic Tiger as Ireland has famously grown to be known now faced challenges that cast doubt over the policies that have bought it progress in the last decades. The global business environment has changed in the last six months, and there is a recessionary effect being faced by each country in the world. Some economies have gone into recession and Ireland is the first amongst euro to officially do so. The world faces a challenge that brings back memories of the great depression. However, what has economists worried this time around is the lack of precedence in dealing with a recession that is this widespread in globalised world where the internet can mean information whizzes around the world in seconds. Governments and companies are struggling to estimate the extent of the problem, let alone be in a position to predict a turnaround in the situation based on the steps that they have taken or propose to take. But what is the root cause of the problem that the world, and specifically Ireland, face?
Literature review
Two hypotheses were formulated to assess the credit crunch affecting Ireland and the world economy, the first being that the organisations failed to put in policies that would help them deal effectively with a downturn. The second was that cost cutting measures alone cannot be the biggest measures to tackle the downturn. A lot of research has been found supporting the first hypothesis but there is a lack of evidence to validate the extent of the positive effect mere cost cutting measures can bring to resolving a recessionary scenario. Cost cutting measures were assessed in relation to companies cutting costs and not in the context of government spending.
As Davis and Karim (2008) detail, seven systemic crises took place between 1980 and 2000 in advanced OECD countries, with minor crises in the USA, Portugal and Italy, and large-scale systemic crises in four countries. The seven crises account for the severe crises only. There have been many more moderate level crises that occurred in this region. Yet there has been no specific defense built in against avoiding the pitfalls of the last few decades. This literature review identify the presence of systemic failures, but there is not sufficient information regarding research on formulating a global organisation or structure that identifies potential market risk, and advises governments to take preventive actions at the right moment. Gordon Brown, in his capacity as the Prime Minister of UK, has now led calls for such an international organization, with information shared by such organizations as the Financial Services Authority (FSA) and its counterparts in other countries.
Barrell and Choy (2005) suggest that the strength of the Chinese current account was responsible for over half of the decline in real interest rates between the late 1990s and the early part of this decade. Wadhwani (2008) also suggests that the strength of the currency and high inflation was considered appropriate in the UK and the US. The UK was aware that its economy was growing at a fast pace in the last decade and it had grown in strength as the financial hub; yet no major policy reviews to assess the health of the financial system were undertaken, nor were steps to taken to limit inflation or stop the currency from appreciating further. There does exist a great deal of literature on the effects of inflation and its effect on economies but Governments and Central Banks have chosen in the past to have differing opinions.
Davis (1987) assessed that a high rate of debt, along with the increasing risk of default, could lead to an economic catastrophe. This is true in the current environment as it is emerging that most large corporations are running on a business model that involves high reliance on debt. The business models have either been unable to break even, or the profits have been ploughed back into a ‘maddening’, and arguably irresponsible, level of growth fuelled by debt. There are three Scandinavian countries that in the 1980’s have had to re-haul their financial systems due to excessive household debt. Bordes et al. (1993) systematically analyzed the causes and effects of Finland’s financial crisis in the late 80’s and early 90’s, and found strategies relating to financial deregulation as the chief factor of the lending boom and the resultant banking crisis. Honkapohja et al. (1999) confirms the results of Bordes’ study, and further claimed that the Finnish experience was subsequently repeated in countries such as Sweden, UK, Mexico, Chile and Asian countries in the late ’90’s. Saxenhouse and Stern (2002) argued that the low interest rate policy, upheld by the Bank of Japan for a longer period than necessary, was the reason for increasing debt and the real estate bubble on a nationwide scale.
There would appear to be some current research on measures on how to deal with inflation, level of debt, and the mismanagement of fiscal policies that lead to recession, or financial crisis in particular. Yet little research was found evaluating the scenario where consumer debt is less, but consumer confidence is also low. Japanese consumers tend to have less debt and a high amount of savings. However, the economy in Japan has recently contracted again due to the lack of consumer confidence in the wider global economy. There would not seem to be any concise answers in the researched literature that provides a remedy to this problem.
Also absent from the research would seem to be any recent criticism of credit rating agencies. Credit rating agencies were a result of a few publishers who several decades ago began providing financial health information about large organisations. This soon grew into a structured credit rating environment, and large credit rating agencies began assessing small companies to government debts and financial instruments. There is little or no research that points to the role of these credit rating agencies being at the heart of a systematic failure to recognise the impact of their rating decisions on the world economy. The role, effect and continued reliance on credit rating agencies needs to be assessed in detail. The following sections highlight the needs for the review.
Methodology
The dramatic effects can be analysed in the context of precisely what were companies doing that led to, or facilitated, the crisis, and what they actually should have been doing in an ideal scenario. The research forming the backbone of the analysis needs to identify patterns in behaviour of companies pre and post the credit crunch. Additionally, information about how companies have managed themselves needs to be assimilated. A survey would help incorporate responses from various companies, thereby generating enough data to aid pattern discovery. In depth interviews could help in getting to know the management aspects of a select few companies. The research design comprising a survey and in depth interviews will also help create a fine balance between quantitative and qualitative methodologies.
There may well be difficulties in persuading companies to share information regarding management approaches pre and post credit crunch. Some of the information may be confidential (especially in light of the Data Protection Act 1984), some embarrassing, or some of it may not be relevant to the handling of the crisis. There is also uncertainty amongst world and business leaders on effective ways to deal with the crisis. In such a scenario it is difficult to expect the respondents to have clear and concise thoughts regarding what they should have been doing and what they should be doing in these times; respondents may also simply attempt to ‘cover their backs’ and ‘pass the buck’ to other individuals or organisations. Hence, it is important that the sequence of administration of the survey research and the depth interviews are leveraged to draw maximum insights from the research.
The survey was administered first to the respondents and thereafter the depth interviews were conducted. The sequence of the research instruments was determined to give some time for analysis of the survey responses. The responses were analysed to measure the completeness of the survey, the nature of responses and any feedback that the respondents had about the design of the questionnaire. The survey was designed as a quick dipstick study to gauge the feedback of the respondents and fine tune any questions if necessary for the depth interviews. The questions were close ended in nature to ensure that the time required to answer them was kept to the minimum. There was only one question which allowed the respondents to share any specific information that they wanted regarding their companies handling of the recession.
The survey was administered via telephone as it was thought to be a medium which would allow the respondents to be flexible with their time allocation. Also, it was possible to give some background to the analysis on the phone. A copy of the survey was sent to the respondents prior to the survey so that it became easier for the respondent to look at available answer options within the questionnaire. The survey was designed in a manner where the respondent could choose not to answer certain questions or give ‘not applicable’ as a response if necessary. The respondents were chosen in a manner similar to stratified random sampling. Seven respondents were selected across five different industries. The aim was to get at least five respondents to answer ninety percent of the questions completely. The questionnaire was divided in various parts. The initial part was designed to understand the level of impact the companies were feeling due to recession. The respondents were asked to rate the level of impact on a Likert scale. The rating was explained to the respondents. The second part concerned how quickly the companies were able to see the recession coming: whether companies had their own systems and reports in place that pointed to lower sales or pressures on margins, or whether there were external sources of information that first pointed to a downturn. The third part of the questionnaire dealt with what the respondents thought in their view the company should not have been doing prior to the downturn. The fourth and final part of the questionnaire dealt with questions of what their companies were doing to get out of recession. The choices that were given to the respondents as part of the close ended questionnaire related to organisational restructuring, cost reduction, lower production, mergers, etc.
The responses were captured in a datasheet and were evaluated to understand if there were any specific questions that received a ‘not applicable’ response from the respondent. This would allow for the dropping of the question from the depth interview or rephrasing the question if it was necessary to ask to understand the Irish recession. The responses provided less clarity around part three of the questionnaire which related to how and when the companies realised that they were in the grip of recession. This section of the questions seems important, as if the companies did not realise what the business scenario was likely to be then the same mistakes could be made by the companies at a later date. It was necessary to probe depth interview respondents on this part of the questionnaire and on the fourth part dealing with the measures that companies have taken to tackle recession. At this point data analysis was not conducted, but merely an understanding of the effectiveness of the research instrument was gauged.
One observation of administrating the survey was the development of the research hypotheses. Prior to the survey the hypotheses was loosely structured. The hypotheses was loosely structured as background research and the literature review did not provide clear pointers to the reasons, methods to tackle, and the potential long term effects of the recession. Some of the questionnaire responses helped to check the relevance of the hypotheses for the next phase of research.
To validate the hypotheses, depth interview was chosen as a research instrument because it is a qualitative research methodology that would permit the asking of open ended questions. The approach provided the flexibility to have a semi structured format that was more discovery-orientated, rather than an approach where one went in with perceptions about solutions and then attempting to validate those perceptions (i.e. confirmation bias). The depth interview provided an opportunity to seek understanding and interpret results. It was not possible to use another qualitative approach such as focus group as respondents might have been unwilling to discuss the financial and strategic details of their companies. Also, if a general discussion was sought it might have led some respondents to be less forthcoming in accepting the shortcomings of their companies’ approaches. It was felt that, though the depth interview might end up asking sensitive questions about the companies’ strategy, the respondents would be willing to share such information as the research is being done for academic purposes and thus is not commercially motivated. This sort of format allowed the respondent to be placed in the position of an expert where his/her opinions are highly sought and he/she was made to understand that his perception and description of the problem were of real value. The recession issue, though caused by financial problems, has a ‘human face’ to it, and a face to face interview mechanism is therefore perhaps the best way to bring out the human element in the problem discussion.
Understanding was needed as the literature review was not conclusive in providing answers to what the companies should have been doing before the downturn or what they should be doing to tackle the after effects of the downturn. Because this approach is conversational in nature it allowed the researcher to ‘take a backseat’ and just listen to a large extent to what the respondent had to say. The depth interview was not selected because it offered a quick answer. In fact, the depth interview provided responses that were needed to be studied in the context of the literature review.
The respondent was selected from two companies having their headquarters in Ireland. Companies that had their bases outside Ireland but had some operations in the region were not chosen as the key decisions might have been made outside Ireland. Companies that used Ireland primarily as manufacturing hubs were also not selected for the depth interviews as they might not be facing demand pressures primarily from Irish markets. Their customers might be based globally, but only because their operations are in Ireland would be making some decisions that could be affecting the Irish economy. The two depth interviews were conducted with respondents of an Information Technology and a company based in the food sector. Financial sector respondents were not selected or sought for depth interviews as there has been a substantial amount of information about these sectors already published in the mainstream media. Selecting the financial or financial services related sector would also limit understanding of what the recession means for multifarious sectors. The fact that the economic downturn began as a financial crisis waning consumer confidence has meant that other sectors too are as severely affected by it. Background research also points to the fact that the Information Technology Company was going through a ‘rough patch’ with pressures both on revenue and margins. However, the Food Sector Company was, it seems, experiencing pressure on margins but revenues were being maintained. This provided a good mix of the interview respondents.
The key influential stakeholders were identified in the two organisations and their time was sought to carry out the depth interview. Questions were based on the responses generated by the survey questionnaire. A set of leading or probing questions and topics were also prepared to guide the conversation forward in case the key questions would fail to motivate the respondents to respond, and thus not generate sufficient information to analyse. The interview preparation was conducted by having a fact sheet, questions and post-interview comment sheet ready. The fact sheet was used to capture the respondent details, the demographics of the respondent and any other special circumstances that the company or respondent was going through while answering the questions. The comment sheet was used to document in detail the responses and also to highlight a few key points that could be used as a research guide later on. Though both depth interviews took place on different days the respondents were asked the same set of basic questions. This was done to avoid any specific qualitative analysis of the interview prior to the process being completed.
The respondents were assured that their information would be used for academic purposes only and any specific data would be masked to prevent identification of the source. A written consent form was taken to the interview. During the interview an attempt was made to establish a rapport with the respondents. An active listening approach was maintained with flexibility given to the respondent to deviate at times from the core of the topic in order to facilitate a relaxed atmosphere. The active listening approach was used as the respondents felt that they needed to provide additional background about their companies operations. Any business environment operation information that the respondents gave was noted. Care was taken not to pose multiple questions at one time. Unclear responses to questions were verified while maintaining the overall time limit of the interview. Though open end questions were asked, leading questions were avoided. Background research on the two sectors and the operations of the two companies was conducted via secondary sources of information. The observations were recorded as notes and an audio recording was made to ensure that a playback of the interview was possible for future analysis.
The data from the survey and depth interview was stored in datasheets. The audio tapes were replayed to capture any information that was not captured in the notes. The qualitative part of the discussion was given a structure to ensure that the data analysis would be supported by structured data.
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