Jextra Neighborhood Stores In Malaysia Case Study

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1. Introduction

There have been many studies relating to preservation of public open space (POS) that were undertaken, such as the effect of perception and socioeconomic standing of stakeholders towards POS protection, spatial POS design planning model, and ‘conventional’ planning policies. However, the perennial issues of POS governance, especially with regards to rampant overexploitation and mismanagement, are still growing that consequently result in POS externalities and market failures (Colding et al. 2013; Ling et al. 2014a). How can this status quo be explained? The current void was the impetus that led to a multi-disciplinary approach to serve as a lynchpin to address this issue.

In this paper, the study areas focus on the districts of Kota Kinabalu and Penampang in Sabah, Malaysia (Figure 1) that emphasised neighbourhood (solely on landed-property and exclusive of the gated communities) residential POS, are also cogently associated with the aforementioned human-ecological conundrum (Ahmad et al. 2013; Ling et al. 2014a). Hence, we primarily employed the ground-breaking ‘Coase-inspired’ property-rights and transaction costs analytic framework1, (Slaev 2014). This is supplemented with the theories of common pool resources (CPRs), social (commons) dilemmas, contracts, opportunism, etc. (see Cole and Ostrom 2012 call for advanced and realistic property theories) as a heuristic paradigm to shed new insights, especially in the local residential commons POS context (Rabinowitz 2012), with the focus on analysing the effects of institutions on the social-ecological interaction as well as its outcome (quality). Such institutional dimensions that generally influence social-environmental interaction, in comparison with traditional commons (e.g. natural resources like irrigation, ocean, forestry and fisheries) is, however, mostly under-researched or paid little attention to. This is notably so in the contemporary residential neighbourhood POS management or governance2 (see, Hess 2012; Mincey et al. 2013; Andersson et al. 2014; Boydell and Searle 2014). Note that we do not claim there are no prior studies at all or extreme deficiency of researches of institutional factor conducted in such new commons (see Dolšak and Ostrom 2003a). However, reviewing the number of new and conventional commons studies in the institutional purview, we can assert is that, the former still postulates more attention and studies. This is affirmed by Colding et al. (2013) as well that according to Digital Library of the Commons in 2011, only 1.4% of studies deal with the topic of institutional property system in such contemporary settings.

Figure 1 

Map of Kota Kinabalu and Penampang districts, Sabah, Malaysia. The case study regions are highlighted in red. (Source: Authors’ work).

Hence, the above justification imperatively drives us to employ non-experimental methods3 to describe the two-stage association between Sabah’s ‘diverse’ institutional arrangements: (1) Institution-based property-rights structure4 (see Table 1), and (2) POS quality. The aims are to address the following key research questions: (i) whether the current diverse institutional property-rights structure relates to the quality5of residential POS (is there any significant correlation)?, and (ii) If there is a correlation, what is the pattern/direction of correlation?, and (iii) to what extent or how influential are institution impacts on the POS quality (what is the strength of correlation)? Such study is significant as it not only contributes to the pool of knowledge, but practical implication is also provided, including insights gained whereby policy-makers may understand better, from an institutional position, the status quo of state-owned POS governance. Thus, policy-makers can start seeking to address the POS management issues by adaptively re-aligning property-rights structure (see more in conclusion and recommendations section below).

The main purpose of Figure 1 above is to display the general Sabah state’s background features, the two districts’ spatial features e.g. size, geographical location, neighbouring natures, area as well as their respective demographic, socioeconomics, and administration of local government (jurisdiction of governance). These are crucial to be for the later part of the analysis and discussion section (see, triangulation idea).

Sabah, as the easternmost state (73,631 km2 land area, located in a coordinate of 5°15′ N 117°0′ E) with an approximate population of 3.2 million people, is also known as a multi-attribute state. Languages spoken in Sabah include Malay, ethnics’ own dialects, English, and Mandarin, and religions include Islam, Christianity, and Buddhism; In addition, Sabah is ethnically and culturally diverse, with more than 60% “bumiputera” or natives (e.g. Kadazan, Bajau, Dusun, etc.), and the rest Chinese and Non Malaysian, especially Filipinos becoming a squatters issue. Predominately, it can be noted that natives or bumiputra are the majority of race in Sabah and hence, it is vital in later Native land emergence and institutions pertaining to it. Also, historically, since it was colonised by the British (aftermath of such colonisation), the current Sabah’s administrative political governance features and urban planning system (i.e. development control, economics, land administration, institutions, and laws) are shaped by it.

From an institutional perspective, land matters within the state’s jurisdiction and outside Federal Constitution, is governed by the state constitution, Sabah Land Ordinance Cap 68. In addition to this ordinance, there are other significantly relevant ordinances pertaining to land and planning matters, including the concept of Modified Torrens System, Land Acquisition Ordinance Cap 69 1950, Local Government Ordinance 1961, Town and Country Planning Ordinance Cap 141 1950, building by laws, etc. Based on the demographic description and 20-point agreement/conditions, Natives make up the majority of the population, in terms of administration and political governance, welfare, and other considerations, thus their interests must be safeguarded. Such natives’ interest protection can be observed during the era of the British Empire and interim self-governance period. The land is generally divided into two types: Native land or non-native land. Country Land can only be owned by Natives (in principle) and Town Land can be owned by other races and/or the Natives. Such classifications are recognised and enforced by law (institutions). Sabah Land Ordinance and other ordinances were crafted and enforced during the British administration. Economically, Sabah generally relies on three key development sectors; agriculture (palm oil, forestry, vegetables, fisheries, rubbers), tourism, and manufacturing or industrial (petroleum). Aside from that, administratively, there is 1 federal territory (Labuan) and 25 districts within the state that they are divided into 5 administrative districts, of which both Kota Kinabalu and Penampang are within the West Coast division. Whilst, at the local level, there are 22 local authorities currently operating in Sabah, of which, 19 of them are district councils, 2 municipal councils, and 1 city hall. In addition, there is also the existence of the Town Board in the organisational structure of the local authorities. However, as mentioned, and indicated in the Figure 1, only the West Coast division, Kota Kinabalu and Penampang, are opted as study areas. Hence, we further dive into them for more discussion.

The capital city of Kota Kinabalu has an approximate area of 351 km2 and a population of 0.63 million (in year 2012). It is located on the northwest coast of Borneo facing the South China Sea (see Figure 1). Being the capital city of Sabah, Kota Kinabalu plays an important role in the political and economic welfare of the population of the entire state. Since Sabah is famous for its variety and diversity in terms of languages, ethnics, religions, etc., Kota Kinabalu is also a multi-ethnicity6, multi-cultural, multi-lingual or multi-dialect7, multi-religion8 city. Besides, administratively, the city is governed by the Kota Kinabalu City Hall and their jurisdiction covers the entire Kota Kinabalu district. Penampang, with a land area of 463.47 km2 that is entirely administered by Penampang District Council, is a district within the West Coast Division of Sabah,Malaysia (see Figure 1). It virtually became a suburb of Kota Kinabalu, which is Sabah’s capital, and is considered as part of the Greater Kota Kinabalu area. Its population was estimated to be around 121,934 in 2010, with the Native Kadazan making up the majority. Donggongon is the main town in the district. Similar to Kota Kinabalu district, it is a multi-ethnic, multi-religion, multi-culture and multi-language district. According to the 2010 census, the population of Penampang was 121,934.

This study focuses on local property rights on POS governance, it is necessary to reiterate and clarify the emergence and acquisition of such public domain order (POS property rules)9 in a summarised manner, especially the factors and the way these factors determine them. Included within the ambit of institutions, the present diversity of rights distribution is a practice-based rights structure that was erstwhile established10. Such long-established and long-executed practice is also ‘formally construed or perceived’ by the officials to be consistent with or hinging on the current de jure system11. Thus, a combination of both de jure (i.e. via provisions of laws) and de facto (i.e. towards government’s practice or conventions that is not necessarily legal) institutions in discerning and shaping the rights or governance of POS12 is apparently obtrusive in this local system. The de jure constraints above include policies, constitution, administrative (organisational) rules, statutory land, planning and housing ordinances, judicial decision and contractual arrangements. The following terms and conditions that are derived from institutions include: the Malaysian supreme law: Article 13 of Federal Constitution, a judicial decision of case law: Sabindo Nusantara Sdn Bhd & Anor v Majlis Perbandaran Tawau & Ors [2011] 8 MLJ 653 on bare trustee concept that derived from Modified Torrens system, Sabah Land Ordinance Cap 68: POS letter of offer and title deed of POS and subdivision rules13, Town and Country Planning Ordinance Cap 141: development plan, local plan, and landscape plan, Local Government Ordinance 1961, and the Housing Development Enactment 1978.

Altogether, these terms and conditions are used to justify and effect the current local diverse property distribution in both CL and NT POS governance (rights and duties exchange). For instance, the publicness of POS for accessibility and consumption, unexclusiveness of POS, community formation in POS, and title deed is only granted on CL POS. Management and ownership rights should be handed over via title deed and the site handing over processes, with temporary management duty being held by private suppliers and/or local government (read more, Ling et al. 2014a on how are those property-rights rules emerged or determined; see also, Ling et al. 2014b). Subsequently, the types of rights involved (ranging from alienation, exclusion, management, consumption, to accessibility), as well as their coupled duties and regimes (positions), are identified for a better picture and understanding. Table 1 concisely illustrates the local formal and de facto (real) practice-based property-rights arrangement in both CL and NT POS governance. The terms and details that juxtaposed within it, will be explained as well.

Based on Table 1, initially, one can distinguish and understand the residential POS governance in two general senses; In the current practice above, only the CL POS is involved with title deed issuance, whereas there is no title deed issued to NT POS. Both POS have their respective terms and conditions but more complex impositions of terms and conditions14 and owners covenants were placed on the CL POS compared to the NT POS. The NT POS is straightforward and more plainly defined since it has no title deed issuance; hence, transfer and site handing over covenants are not imposed on it. In the contract, there are three different phases of process in the contract for the CL POS, starting from (i) un-transferred POS title deed and un-handed over POS site in which, the subdivider who is the legal and equitable owner, is mandatorily subject to the temporary (18-month) owners covenants15; then (ii) only after the fulfilment or satisfaction of the aforementioned owner’s covenants, of which the permissible site handing over coupled with a registrable16 memorandum of transfer, are executed, the subdivider (title holder), who is a bare trustee, is officially considered relinquished of his active ownership and management rights of the space to the local authority (equitable owner) even though he is still a legal owner as the title deed is not even transferred (or still under the private subdivider’s name). That is, within the scope of the bare trustee concept, the equitable rights are more crucial in the sense that they outweigh and prevail over the legal rights.

After the title of POS is issued, the active and actual rights are assigned to the government when the POS site is handed over. Whether the title transfer is executed or not, does not really matter. However, if the equitable local government claim priority by ‘substantiating’ its interest or rights on the POS for becoming a legal landowner, then the registration of transfer should take place (see, Section 88 of Sabah Land Ordinance provision that “…valid until it is registered…”). Note that this interim/temporal mechanism of site handing over is to address the problems of late issuance of title deed that normally takes years due to government bureaucracy. After fulfilling the minimum 18 months of owner covenant, the subdividers will normally choose to apply for transfer or hand over their management and maintenance duties of POS to the government because they do not want to bear further costs of maintenance. Such a measure is necessary as the local authority should be the ultimate equitable owner and manager of the POS. However, private suppliers may retain maintenance duties for 2 years or more as long as they maintain it for the sake of marketing/reputation benefits. This is allowable since handing over or transfer is not legally deemed compulsory.

Additionally, it is also noted that in particular neighbourhoods, the POS management duty can optionally be shared among the community or residents who live nearby. That is, there are some neighbourhoods engaged in such cooperation with local authority. Some POS are managed by two cooperative entities – the local government and community – or managed by the typical one entity – the local council only. For the former, any residents, regardless of race, can voluntarily form a committee and act as a neighbourhood watch. The committee should consist of approximately 10 members, including the president (as a leader), vice president, secretary, treasurer, coordinators and other members via registration, to ‘partially’17 assist the local council in POS management. Duties include monitoring and ensuring the safety, security, cleanliness, and condition of amenities/facilities of the POS. In fact, agreement between a group of residents and the local authority are likened to a contract formation. Either party can offer such bids for the sake of the public good. As mentioned, there are various types of assistances involved. For example, if any vandalism or safety and security issues arise, they may report these issues to the council and be called upon for government meetings to raise their current needs and problems. Occasionally, the community is also involved in ‘communal work/activities’. This involves collaboration among residents, especially to organise cleaning campaigns at their compound. In practice, one committee typically is in charge of more than 1 neighbourhood. On average, one committee could be responsible for 3 to 5 neighbourhoods in which one neighbourhood may consist of more than 1 POS. In the district of Kota Kinabalu, Sabah, only thirty committees were formed18 to oversee more than 100 tamans (neighbourhoods) or POS, some of which are de facto inactive/passive in exercising their duty (see, Ling et al. 2014b). If the particular neighbourhood performed their work effectively, a non-monetary prize or an award will be conferred upon them by the local government.

Finally, in the last phase of the process (iii), when the title deed of POS is issued by the land office, the previously handed-over POS title should be transferred to the local government. If the title deed is successfully transferred via registration, the equitable local government becomes the legitimate owner and manager of the POS of which some rules that applied to the private suppliers in the 1st phase of the CL POS is extended to the local government. For example, no further alienation or transfer is executable by the government, and the space must be remained shared (for public purpose), unexclusive and unchanged in terms of its purpose.19 Until 2010, about 63% (190 POS) were not yet transferred as the signed memorandum of transfer was not submitted to the land office for registration. In fact, only the transferred POS titles are entitled to specially be funded by the federal government’s initiative, via the Ministry of Youth and Sports with extra allocation to upgrade its quality. Upgrades include redeveloping the facilities, such as the old futsal, basketball court into a better and more equipped facility. Additionally, the management regime is similar to the previous phase (handed-over but un-transferred CL POS) whereby, the non-obligatory co-management between local residents and local government is allowable. To sum the CL POS rights distribution, in spite of the slight differences within its transitional process, all the owners (both private subdividers and local government) are considered claimants because the main and active rights that are engaged are management, consumption and access rights.

Next, since the un-titled NT POS is surrendered to the state authority for subdivision purpose and no title deed is granted, which also signifies no complex site handing over as well as title transfer and other alienation procedures like the CL POS are involved, its ownership is automatically held as state land and hence, a state property (see, Section 5 of Sabah Land Ordinance). Since such POS is taken as state government property, the management duty should logically and de jure be held by the government (local council) (see, 38(1) of Local Government Ordinance). However, such de jure procedure may not inevitably and practically be implemented; there are issues whereby the gazetting and vesting procedure are not performed (see, the case of Sabindo Nusantara Sdn Bhd & Anor v Majlis Perbandaran Tawau & Ors [2011] 8 MLJ 653; see also, notes of proceedings of Sabindo open space trial, 2009). Therefore, in short, for the NT POS status, although the land ownership is held as state property, the management or maintenance is formally and de facto being held as an open-access resource or is left ungoverned. Such regime, subsequently, reflects its bundle of rights. The local government is considered a normal public user (with use and access rights) since there is no recognised management right vested in them. Despite the differences within the 3-phase CL POS, or between the CL and NT POS, all of them are meant for the public who are granted use and access rights, and they are considered un-exclusionary spaces.

The information presented in Table 1 demonstrates the prominent diverseness of local property-rights institution in POS governance. These are the main observed complexities in the current local POS governance. That is, general issues of title deed issuance, community association presence, POS site handing over, and transfer of the POS title deed can diversely determine the alignments of rights, regimes, and management duty of POS. In tandem with the study’s objective, it is important to understand whether these heterogeneities matter on the governance, wellbeing, and quality of local POS. More specifically, with emphasis on the state-owned POS 2nd and 3rd phase of CL POS and NT POS (see Table 1), we look into the following aspects: (i) title existence of POS: is the title deed granted on the particular POS? It is possible to have POS with a title deed (i.e. CL POS) and POS without a title deed (i.e. NT POS); (ii) POS community existence: does any community association exist in the particular POS? POS can exist with and without community presence; (iii) POS title deed transfer to local government: Has the title deed of POS been transferred to the government? POS title deed can be transferred or not; and lastly, (iv) Period of POS site handing over: when did the site handing over take place? It could be within any of the following 3 categories: prior to the year 2000, between 2000 and 2009, and 2010 to present. All of these different categories (hypotheses) are tested whether they are significantly associated with POS quality.

As a final note of this section, there are several justifications on the selection of residential (landed property) POS and two local districts only, as study areas. Firstly, the emergence of POS social costs in both districts is probably due to the uniqueness of the institutional factor, namely, practice-based diverse property-rights structure arrangement that possibly contributes to POS negative externalities (see Table 1). In addition, residential land use is the sole focus instead of other types of land uses, such as agricultural, commercial, and industrial. Residential land is considered the largest land use; thus, it is possible that ample POS are created in this land category. This renders more samples/cases include in our sampling work. More importantly, a larger sample size can ensure our quantitative analyses are feasibly generalisable and valid. Additionally, due to the institutional arrangement, other land uses do not provide NT POS instances; hence, to make this study more inclusive and comprehensive, only the residential land use is focused. Since only the residential land use is emphasised, this leads us to choose uptown NT and CL POS solely, excluding the town lease as it is located in the city centre area and is normally meant for commercial (mixed-development) purposes and rarely for residential use. Thus, the inclusion of the town lease would subject this study to a sampling issue. Another rationale is to ensure our samples are homogeneous, at least in the land use sense (see ceteris paribus concept). Also, the landed (non-stratified) and unexclusive space is emphasised because the stratified and gated space is subject to another set of institutions that is beyond the scope of this study. Moreover, Kota Kinabalu district was selected because the land office, the Lands and Surveys Department, is the headquarters, and their decisions pertaining to POS governance are constitutionally enforced in the entire State. This simply means other districts must follow such institutional verdicts. Also, this is vital to get first-hand and the latest information from such an authoritative department. Next, due to data sampling limitation (i.e. data accessibility and unavailability particularly on POS that subsisted from Native Title (NT) land subdivision), the Penampang district which neighbours Kota Kinabalu was chosen.

This descriptive-explanatory paper is, thus, structured in 5 sections that proceed as follows: (i) literature review with theories and background of property arrangement and commons, and its impacts on POS governance and quality; (ii) methodology on POS sampling strategy, POS quality rubric development, data collection on POS quality and property-rights attributes, and statistical analyses; (iii) results and findings on each property-rights variable with POS quality; (iv) discussions with the assistance of the triangulation method; (v) conclusion and recommendations that consists of knowledge contributions, policy implications and significance of the study, limitations as well as future research.

Table 1

A de facto and formal overview of practice-based diverse property-rights and regimes positions in Sabah’s non-stratified residential public domain1: Country Lease (CL) and Native Title (NT) POS governance.

*Only certain districts and neighborhoods adopt such regime on some POS.

(Source: Adapted from Schlager and Ostrom 1992; Colding et al. 2013; Ling et al. 2014b).

1 For everyone and anyone even though they are not the citizen of the local districts or the State.

2 The subdivider becomes a bare trustee who is divested of his equitable rights/interest on the POS, except a non-active duty i.e. executing POS title transfer registration to council (see FAQ Sabahland 2014 on the definition of bare trustee concept and Modified Torrens System).

3 From de jure point of view, the POS should be vested in local government under the state property.

2. Literature review

2.1. Neighbourhood commons: residential POS quality as common pool resource (CPR) and externalities issues

Various interpretations of POS are dependent on the contexts. However, since the essence of “no excludable” and ‘publicness’20 of space is keyed out, it sets apart as an unrestricted access place for the public. Such resource, in fact, encompasses a wide array of functions or typologies of space, but only the residential neighbourhood spaces, as “local public goods”, are emphasised in this paper. This includes community or neighbourhood parks, gardens, playgrounds, playing fields, and basketball or football fields. Furthermore, from the commons perspective, such resource domain is considered as a neighbourhood residential commons that is a form of non-traditional commons (Ostrom 2002; Hess 2008). This is typically regarded as a common pool resource (CPR) that possesses two attributes: non-exclusive and substractable/rivalrous. These attributes apply to POS quantity and quality aspects. First, it is difficult to exclude or control users from appropriating POS good quality without impairing the POS condition. Secondly, the antecedent POS quality attributes can be fugitive, as once the POS quality is not well-maintained by one user, only poor quality and unusable space is available to others. For the issue of quality of space, there are many POS measurable quality attributes or ‘qualities’, such as facilities and amenities condition and functionality (maintenance), cleanliness, security and safety, surrounding atmosphere, accessibility, diversity and adequacy, aesthetics, incivilities, landscape feature, greenness (naturalness), and comfort. A few considerations (e.g. different purpose, size, location, types of space and tool users that classified into several domains and items) were coined by scholars (Greenhalgh and Parsons 2006; Hillsdon et al. 2006; Green Flag 2008; Gidlow et al. 2012; Kaczynski et al. 2012; Van Dillen et al. 2012). All these quality domains are sufficiently covered as they are vital as useful references in crafting the local POS rubric (see more in methodology section).

CPR-based POS may generally be subjected to two prominent quality predicaments: appropriation (consumption) and provision (management) (Ostrom et al. 1994). An appropriation issue is associated with the misallocation of space among its users, such as when users undertake activities in a way that deteriorate the POS quality. In contrast, the provision problem is the inefficiency of enforcement on management and maintenance in preserving the POS condition; if the landowners and beneficiaries do not contribute to maintain the quality of POS, the POS will be vulnerable to social dilemmas, such as overexploitation (see, Tragedy of the commons by Hardin 1968), shirking, free-riding, rent-seeking, etc. This can result in negative externalities like vandalism, pollution, squatters settlement and encroachment, graffiti, disused (underused) or desolate space (no man’s land), unsafe and dirty parks, broken windows theory on crimes (see, Wilson and Kelling 1982) and consequently, suboptimal POS quality (Hess 2008; Foster 2011; Ling et al. 2014a,b). In fact, there are a number of factors that trigger the fall of CPR-based POS into such a fate, but only the contextual (institutional) determinant is emphasised (see Dolšak and Ostrom 2003b for other possible factors affecting CPR governance, especially its consumption). Hence, in the following section, we thoroughly discuss the connection between the institutional property-rights system with the POS governance and quality.

2.2. Institutional property-rights structure on POS governance and quality

There are numerous leading scholars, from varied disciplines, who have made significant and seminal contributions in studies relating to new institutional economic domain in relation to resource governance (see, one of the pioneers Coase 1960; see also, Demsetz 1967; Barzel 1989; North 1990). However, prior to an in-depth discussion of institution and resource association, we provide a concise review on the background of institutions and property-rights system.

2.2.1 Background and definitions

Property-rights structure that consists of two distinct underlying constituents, property (bundle) rights and property-rights regimes (Buck 1998; Heltberg 2002), are considered institutions (see also Cole and Ostrom 2012 for more property systems theories’ definitions and meanings). Relative property-rights, regardless of the vast definitions, are generally referred to as economic rights that are associated with liabilities and restrictions, and are possessed or owned by individuals over the resources, which are either de facto or de jure recognised (Musole 2009). The economic rights here are like a bundle of ‘sticks’. Each stick signifies a type of right (e.g. use, alienation, management, etc) (see, Schlager and Ostrom 1992 see also, Musole 2009; Boydell and Searle 2014). Thus, exchanging of rights and duties among individuals is actually a form of contract (agreement): “as a document that sets out a set of rights…” (Lee et al. 2013, p. 4). All of the above types and attributes of stick bundles are about ‘rights’ themselves. It might be useful to ask, ‘what’ grants or defines the rights bundle besides the legal and self-enforced constraints?

Buck (1998) argues that property (bundle) rights are determined or characterised by the property-rights regimes (see also Fuchs 2003). By knowing the distribution of rights among individuals, one can determine the type of regimes. Further, Quinn et al. (2010) demonstrated that each regime is associated with different types of bundles of rights. This was corroborated by Hanna et al. (1996) and Bromley (1991), who argued that it is a form of institution. Hanna et al. (1996 p. 9) further posited, “Property rights regimes are critical institutions... They link society to nature and have the potential to coordinate human and natural systems in a complementary way for both ecological and human long-term objectives”. Such institutional regimes can be classified into four typical categories: open-access, common-property, private property and state property (Heltberg 2002). Each of these categories, with its singular design, generates different resource governance and quality output. However, in reality, those regimes are not often ‘purely’ assigned or simply ‘overlapping’.21 Therefore, an evidential interrelationship between the property-rights regimes and property-rights have defined the resource system and the POS categorisation of economic goods (Buck 1998).22

2.2.2 Roles and implications of property-rights structure: state-property, common-property, private-property and open-access regimes in POS governance and quality

Grafton (2000, p. 504) contends, “property-rights are the fundamental to understanding the problems associated with the exploitation of the environment”. Such institutions determine the resource governance and output successfulness in terms of their productivity, optimality, quality, efficiency and sustainability (see Dolšak and Ostrom 2003b; Cole and Ostrom 2012). Similarly, Demsetz (1967) argues that property-rights that define the incentives and cost structures, are created for the internalisation of externalities. Economic theory further advocates that property-rights are strongly colligated with the concepts of transaction costs23 and incentives coordination. This means that changes within the institutional system, in turn, modify the incentives and costs structure. Thus, the institutional design and property-rights based transaction costs and benefits analysis can influence the agents’ economic behaviour whether to govern and use the resources efficiently (Musole 2009) (further illustrated in Figure 2 by Buitelaar and Needham 2007). For instance, due to the current institutional system, especially in relation to rights enforcement issues, ceteris paribus, when the enforcement cost is high (i.e. costly and time-consuming), there is low incentive to enforce and a higher possibility of people choosing to shirk. For example, this may lead to under-investing or mismanaging the resource, and subsequently ensuing in negative externalities. However, this does not imply that high transaction costs will lead to low incentive; rather, this has to be contingent on whether the external incentives come into play (Coase 1960). This relationship serves as a pre-requisite, particularly in explaining the issues of why or how the property-rights affect the costs and incentives allocation, and hence, market (social) behaviour and sustainability (social, economic and environmental) performance.

Figure 2 

The relationship between institution, property-rights system inclusive of transaction costs and incentives structure, market behaviour and economic performance. (Source: Buitelaar and Needham 2007; see also Acemoglu et al. (2001).

In association with the preceding highly vulnerable CPR-based resource, scholars have nem con testified that complex scenarios of property-rights structure issues that induced stakeholders to be incentivised to either internalise or externalise the externalities, can generally be categorised as follows: definition of rights, security of rights, and alignment (adaptiveness) of rights (Ling et al. 2014a). To determine whether the above institutional design becomes an issue, in line with Webster’s (2005) methodology (i.e. common-sensibly judging via externalities from neighbourhood quality) the persistence of externalities is evaluated. However, for this paper, only the misalignment, attenuation and insecurity of property-rights that are inclusive of land titling issues are focused.

Our discussion now shifts to the preceding property-rights regimes in POS governance. POS are, de jure, conventionally nationalised or being held as state-property regime24 (Webster 2007; Garnett 2012). Although there are desired outcomes of such a Leviathan regime, many scholars still argued and demonstrated that it mostly brought more harm than good. Various justifications have been provided on the failures, such as corruption, rent-seeking, lobbying behaviour, poor policy prescription, monopolisation due to lack of competition and proper audits by external authorities, poor maintenance, poor management and sanction enforcement on wrongdoers, political red tape, overburdening of financial/fiscal resources, shortage of man-powers, and technical restraints, especially in dealing with the increasing number of scattered POS. As a result, delaying their wielding work may be the only choice to reduce workload. In some cases, they may not attempt to manage at all. In fact, such deferral or abandonment of work may worsen the condition as the next repair would incur a higher and excessive cost (over budget), and may cause the authority to totally neglect it (Ali et al. 2010).

In addition, these regimes have a low priority towards local social-environmental preservation compared to the economic goal; that is, they may rather choose to neglect or underfund the green POS maintenance as it is not economically profitable or non-revenue generating (Colding et al. 2013) compared to other public amenities, such as road maintenance. Thus, public space management takes little precedence (Carr et al. 1992). Such ‘regulatory slippage’25 on POS (Foster 2011) is, in turn, recognised as mere ‘paper parks’. This further confirms Bromley and Cernae’s argument that “Unfortunately most state property regimes are examples of the state’s reach exceeding its grasp. Many states have taken on far more resource management authority than they can be expected to carry out effectively…” (Bromley and Cernae 1989, p. 25). Such government-created tragedy has degenerated in the private property or open-access resource regime. The resources of both regimes are entirely open to be degraded in both quality and quantity (see Malek and Mariapan 2009; Zakaria et al. 2014 for degradation of government-owned local POS in Malaysia). As for the former (private-property regime), an individual may ‘claim’ the POS belongs to them of which they ‘misuse’ it for their private interests, like building house extensions, squatting, car-parks, etc. Whilst, for the latter (open-access resource), as exhorted by Ellickson (1996, p. 1168), it is “classic sites for tragedy”. Such unowned and unregulated regimes on scarce POS has a high propensity to be doomed to dilemmas, as seen in Hardinian’s tragedy (Hardin 1968), because everyone with ill-defined use rights are strongly incentivised to overuse it. That is, no one can preclude others from consuming it and nobody is willing to invest in its management and restoration.

A number of strengths and desired results were observed (Ostrom 1990; Agrawal 2001), particularly on POS (Chen and Webster 2006; Lee and Webster 2006; Colding et al. 2013) in the case of common property regime or self-organisation collective action (e.g. via committee associations on resource governance). In essence, such common property institution is possibly viable, equitable, stable, efficient, ecologically appropriate and sustainable, especially when some criteria or design principles are accomplished. Scholars like Wade (1987), Ostrom (1990), Stevenson (1991), Baland and Platteau (1996), Agrawal (2001), Dolšak and Ostrom (2003b) established and shared some successful characteristics or principles as follows; (i) community attributes: small size and homogeneity of group, social capital, experienced leadership and trust establishment, (ii) resource domain attributes26: considerably small size, low mobility, high predictability of resource, and spatially strategic and (iii) governance rules attributes: clearly defined boundary of resource, highly dependent on resource, secured or governmentally recognised, clear property-rights tenure on such governance, having graduated sanctioning (Van Miltenburg et al. 2014) and conflict resolution platform, and less governmental intervention, e.g. some assistance – in terms of technical, and compensation can be rendered to the local community.

However, these can contribute to this regime's failure, even in the initiation stage, if some crucial principles are not fulfilled. In this case, transaction costs may escalate (see seminal work: the logic of collective action by Mancur Olson (Olson 1965). For example, quite a number of local management housing corporations failed to manage their common spaces due to users’ shirking and free-riding behaviour; hence, the supplier had to undergo bureaucratic procedures to recover the responsibility (see more, Tiun 2006). Despite the successful rules of principles, some scholars, opined and showcased otherwise. For example, it has been shown that a bigger and heterogeneous community may contribute more resource input. This is somewhat coherent, as an ever changing social ecological system requires an evolved set of design principles that may contravene the previous ideas (see more Van Laerhoven 2010; Ho and Gao 2013).

Generally, such institutions enable the co-proprietors to exclude free-riders and outsiders27, and delimit and govern consumption rights of individuals so that overconsumption of the resource does not ensue. Moreover, local users have a better understanding, sensitivity and specialised knowledge of their needs and environment than an external top-down government approach or private enterprise; hence, they have the ability to craft institutions that complement their present change, necessity and circumstances, such as management and consumption rules as well as sanctions on the violator (Tucker 1999; Chen and Webster 2006). In terms of management and control, those users that are closer to a local POS (Webster 2005) may effectively undertake their tasks as they are the persons who are at a better position or more likely to communicate with other users, and invest time in maintaining and monitoring the users as compared to a private or state regime (see, subsidiarity principle) (Van Laerhoven 2010). In addition, as they are the ‘regular’ users, especially those individuals having strong social-ecological ties, these individuals are unlikely to intentionally misuse it. For instance, in Malaysia, a concept of community involvement or neighbourhood watch like “Rukun Tertangga” is formed with a desirable outcome (e.g. less vandalism and crimes) because residents willingly enforce their rights, like collectively patrolling around their compound and frequently engaging in activities together (social capital increased) (see, Abdul Karim and Abdul Rashid 2010). Despite this institution’s success, it does not necessarily entail that this is the sole “one-size-fits-all” cure for internalising the dilemmas-triggered-externalities. In exchange, a dynamic governance to adapt and evolve over time in complex and rapidly varying social ecological system is required (Dietz et al. 2003). Whilst, for well-defined private property regime, normally a registered title deed that acts as evidence is issued to the subdivider or owner. Such deed does not only give a legal recognition of tenure; it also gives some impact on the owner’s perception and concept of their tenure security where the titleholders may feel more confident about their ownership on the resource as insured, un-challengeable, tangible and guaranteed with no risk of resource dispossession (Markussen 2008; Payne et al. 2009). Hence, it incentivises them to be more willing and responsible to the provision and investment in the resource, which increases its value, quality and productivity (Marx and Rubin 2008). However, some studies also showed that land titling demonstrated otherwise, in that there was no significant impact of land titling on resource outcomes (Heltberg 2002; Sitko et al. 2014).

Nonetheless, many scholars still concurred that private property is the most efficient and sustainable kind of ownership in governing resources (Demsetz 1967; Barzel 1989). This is also advocated as one of the measures to resolve Hardinian’s tragedy (Hardin 1968). The idea is that individuals can internalise the externalities by echoing Coasian’s theorem bargaining concept by enforcing exclusion on outsiders, and controlling the usage as well as transfer of resource to another person that either improve resources or economic production (Berkes 1996). However, such institutional exclusive rights will not be effectively enforced if the private economic interest is not compatible with the environmental protection. Additionally, it may not be appropriately and sustainably applicable in this unpriced POS because the ownership and exclusive rights (benefits) are attenuated to a point that it becomes a non-exclusionary, non-commercialised and inalienable POS. This, thence, causes dissatisfaction of the private supplier because the economic and environmental costs outweigh the benefits. Oftentimes, the gains collectively shared by the free-riders are too low and unpredictable (Acheson 2006; Quinn et al. 2010). An attenuation of private right28 is the weakening or expropriation of the exclusive private property rights of the owner by the State that can either be in the forms of utilisation, alienation, exclusivity, tenure duration. This means it may benefit a third party, such as the enhancement of social-ecological welfare.29

As indicated by Furubotn and Pejovich (1972) and Acemoglu et al. (2001) in a study of institutional effects, expropriation or attenuation of private property rights is important as it influences the owner’s expectations and actions on the uses and management of the resources. Severe attenuation may then incentivise the owners to have short-term planning by shirking or adversely utilising the POS. Hence, by engaging in shirking (e.g. inadequate maintenance) or overexploitation (e.g. misused for other purpose), owners can at least incur less costs and may profit some other gains from the resources to ‘cancel out’ or cope with the ‘disadvantageous’ rights of attenuation impact. However, from the developers’ perspective, such rights attenuation does not always trigger them to behave self-interestedly, especially when some elements are present, such as stringent coercion by the government. Any incompliance of or ex-post opportunism is regarded as a breach of contract, whereby the violator is subject to sanction that are ex-ante defined (Williamson 1985). So, from this, the developer is bound to fulfill the restrictive covenants (see contractual neighbourhood governance by Webster and Goix 2005). In addition to that, such breach may extend the sanctioning impact. That particular developer may face a hard time securing the next project approval from the government. Therefore, for long-term gain, they may not choose to blemish their reputation and give up their prospectively lucrative projects (see Glasze et al. 2006).

Private suppliers are also willing to take their own initiatives and interest to invest for maintaining such commons because: (i) it is part of their marketing strategy to sell off their properties as well as heightening their nearby properties value and price, and (ii) it is part of their reputation strategy. Stiff competition among developers leads to market pressure to see who can produce better quality of space (Bowman et al. 2009). In short, growing privately owned and managed CPR-based POS may, often, contribute to a successful and good public space governance and quality due to the entrepreneur’s firm capacities in technical, financial, and man-power. This enables them to deliver better maintenance, control use, monitoring, etc (Glasze et al. 2006; Foster 2011). Therefore, in a priori sense, based on the foregoing syntheses, this clearly shows that institutional design does cogently matter in POS governance, of which it influences POS utilisation and management, and subsequently, its quality. For a better understanding, a conceptual framework is showcased in Figure 3.

Figure 3 

Interplay between institutional property-rights structure, transaction costs and incentives distribution, stakeholders’ behaviour and action and POS quality. (Source: Adapted from Gerber et al. (2009) and Ling et al. (2014a).

Therefore, we formulated 1 main general alternative hypothesis, which encompasses 4 testable alternative (directional) hypotheses divided into 2 stages as follows:

General hypothesis:

Overall, by considering the 1st and 2nd stage of associations below, there is a statistically significant difference or association between the current local institutional property-rights structure and POS quality.

  • 1st Stage:  There is a statistically significant difference between (i) title deed existence and POS quality; i.e. POS with title deed is more likely to contribute good POS quality.
  • 2nd Stage:  There is a statistically significant difference between (ii) community existence, (iii) title deed transfer to government, and (iv) site handing over period to government with POS quality; i.e. with community involvement, title deed transferred to government, and the later the site is handed over to the government, it is more likely to lead to good POS quality.

3. Methodology

3.1. Study sample size

With the post positivism paradigm, we deductively employed a cross-sectional case study design of a total sample of 172 residential POS from the two districts. They encompassed 11 neighbourhoods,30 within two different local authorities jurisdiction, in which 150 CL POS was ‘probabilistically’ sampled via stratified random sampling of a total population of 350 CL POS from Kota Kinabalu, while the entire population of 22 NT POS were all sampled from Penampang districts, respectively.

3.2. Data collection procedures: measures and instruments

Different data sources were gained by different techniques and tools, including a POS quality audit and government document archival search. The variables selected for this study were based on the study area’s property-rights structure design, as well as POS quality features, which were underpinned by review of the literature. Full details of data determination and collection process are shown as follows:

3.2.1. Dependent variable: quality of public open space (POS)

We garnered the qualitative-to-quantitative data of POS quality via the direct structured observation. For each POS, about 10 pictures were captured for evidence and recording purposes. We journeyed on-foot to visit the areas under study, with the assistance of a Global Positioning System device and a hard-copy map of Sabah, once these two main criteria31 of POS were fulfilled: (i) publicly accessible, (ii) the minimum size of POS is at least 1.5 acre. During the daytime inspection process, which was carried out between 20th March 2014 and 15th June 2014, only 2 assessors participated in measuring the POS quality, of which one researcher was directly involved and the other assessor was a public official research assistant who was hired and was provided approximately 3 hours of training and given a briefing session on employing the POS quality audit tool. Both of the assessors worked together to measure the individual POS quality. In order to objectively measure the POS quality via observation, an audit tool was developed. We reviewed and relied on a number of established templates/measure items (approximately 25 tools)32, including the Green Flag Award (Greenhalgh and Parsons 2006), Neighbourhood Green Space Tool (Gidlow et al. 2012), Community Park Audit Tool (Kaczynski et al. 2012), and the local government’s (Kota Kinabalu City Hall) pre-existing audit tool. Our tool, thus, consisted of 34 items grouped into 6 interrelated domains, namely safety and security, cleanliness and hygiene, aesthetics, availability of basic amenities, functionality of facilities and amenities, as well as horticultural landscape features.

After finalising the above quantitative rubric coupled with the structured observation approach, specifically for structured quality measurement and assignation of score to each item of the POS site, the Green Flag Award tool or methodology was primarily adopted (Greenhalgh and Parsons 2006; Green Flag 2008). A 4-point marking scheme between 0 and 3 quantitised score was crafted (see figure 4). When assigning a score for each relevant item, a list of detailed descriptions or philosophy of POS rating as a guideline or operational framework was prepared for reliability. The Green Flag Award standard uses 70% field assessment and 30% desktop element to gain a total score; however, for this strategy, only the field assessment criteria were employed. To attain a good or high quality POS score, a minimum of 60% or 12.6 points on the field research must be achieved. That is, the quantitised scores were summed up, then the mean33 was calculated and multiplied by 7 (field assessment, 70%), in order to arrive at a final score out of a possible 21 points (Waltham Forest Council 2010; Portsmouth City Council 2012). After that, they were dichotomised into two categories, either poor (low) or good (high) quality based on the above guidelines. Finally, we nominally codified them: 0=low quality and 1=high quality, so that it fits for the later part of the analysis.

Figure 4 

Field Research Scoring Guide. (Source: Adapted from Portsmouth City Council (2012).

To get this tool validly and reliably developed, we underwent several stages, namely: (i) review of existing instruments for criterion validity, where we gained some ideas and insights in building our own instrument via a rigorous review on approximately 25 existing and established instruments. By doing this, we know what possible items and domains should be included and assessed in our instruments, as well as the scales (points) and benchmark in determining the quality of space. This is where we try to ensure our tools are highly similar to other validated measurement tools. Next, (ii) a draft tool was disseminated to an expert panel (academicians and local government officials) for face validity; that is we sent our drafted tool to 3 landscape and planning lecturers and the local government of our study area (Kota Kinabalu City Hall) to check whether the proposed items and domains are relevant or close enough to the local system. In fact, several notes of the experts were made that lead to some changes and amendments accordingly. Thirdly, we moved to (iii) a pre-test, which was used to strengthen the reliability and validity of the tool by familiarising the drafted tool and auditing process in a real system. We executed pilot tests on 10 non-study area local POS, namely a basketball court, playground, and badminton court, in which minor changes were taken into account (addition and/or modification of a few items in the operational framework, such as the addition of “surrounding cleanliness of POS” item). Lastly, (iv) taking all the above amendments into considerations, we sent the final tool to the previous experts for a final round of review and approval. Only after the above process was completed to obtain the final valid and reliable tool, did we officially run the tool in the study-area POS. Inter-raters (percent) agreement and reliability (Cohen’skappa) of the instrument between the 2 auditors were assessed, by comparing overall item scores in the dichotomous form (i.e. 0 or 1). In the 1st stage of 172 POS sample, a score of 93.6% and 0.87 was obtained, while for the 150 POS sample, 92.7% and 0.85 was scored. These figures indeed were acceptable since both satisfied the benchmark of minimum 70% as well as 0.6 for inter-rater agreement and reliability (Kaczynski et al. 2012).

3.2.2. Independent variable: property-rights structure characteristics

Primary and secondary sources of unpublished data pertaining to the hypothesised attributes of property-rights structure are: (i) title deed existence; (ii) community existence; (iii) transfer of title deed to local government; (iv) site handing over period to local government. These attributes were elicited via a document archival search from various governmental (land offices and local authorities) departments.34 These data include title deeds of POS, letter of offer on subdivision of land, subdivision and development plans, subdivision applications, memorandum of transfer of POS, statistical records of community formation with terms and conditions in residential area, list of handed and unhanded over POS sites, a list of un-transferred and transferred POS title deed and a list of NT POS. Most of these acquired data records were between 1990 and 2013. After the acquisition of a diverse and massive amount of data, we processed and content analysed them, and grouped them into distinct categories by number-coding them. The data was grouped as follows: Title deed existence: 150 POS with title deed (“1”) and 22 POS without title deed (“0”); community existence: 28 POS with community presence (“1”) and 122 POS without community presence; transfer of POS title deed to government: 25 POS title was transferred (“1”) and 125 POS title has not been transferred (“0”); and site handing over to government (year): 90 POS site handed over before 2000 (“0”), 42 POS site handed over between 2000 and 2009 (“1”) and 18 POS site handed over in 2010 and above (“2”).

3.3. Statistical analyses

First, a 2-stage non-parametric analyses using Pearson’s Chi-Square tests (χ2) cross-tabulation, was performed to determine the association between Sabah’s property-rights structure (i.e. 4 preceding hypothesised attributes) and POS quality. That is, the 1st stage analysis acts as a prerequisite and involved all 172 POS samples (both NT and CL POS), while in the 2nd stage provided a more in-depth analysis that solely involved 150 CL POS samples. The rationale for using only 150 POS instead of 172 samples of POS in the 2nd stage analysis is because in the results and findings section, the reader may discover that there is a need for further scrutiny in CL POS idiosyncratic property attributes only, without involving the NT POS property traits. Thus, inclusiveness of 22 NT POS samples will distort the data and result in statistical errors (see the introduction section above). Chi Square analysis was opted because of a few reasons, including: (i) it is an established, widely-used and simple test in exploring relationships between variables; (ii) due to the categorical nature of our data variable forms (i.e. nominal and ordinal data); the data obtained are not normally distributed; (iii) our sample size of 150 or 172 POS is adequate to perform such analysis (Sekaran 200335). Next, we employed inferential statistics with p-values at a significance level (5%) alpha cutoff ≤0.05,

Unformatted text preview: For the exclusive use of K. Bubb, 2015. TB0249 Andrew Inkpen Jextra Neighbourhood Stores in Malaysia In October 2010, Tom Chong was on his way to his office and thinking about several issues he would have to deal with in the coming weeks. Chong was Jextra Stores (Jextra) country manager for the Neighbourhood Markets Division in Malaysia. One issue involved a conversation with the mayor of Klang, a town near Malaysia’s capital city of Kuala Lumpur. Chong had been seeking to expand to Klang for some time. The mayor surprised Chong with an offer to help with land zoning if Jextra would help finance a new primary school (or at least Chong thought that was what he had been asked for). The second issue involved the job performance of Arif Alam, Jextra’s top-performing buyer. Alam, a buyer of fresh fruit and vegetables, consistently negotiated better contracts than Jextra’s fifteen other buyers and, Chong believed, better than Jextra’s competitors. The contracts negotiated by Alam certainly contributed to the excellent financial performance of Jextra Malaysia. Nevertheless, Chong could not help wondering if there was more to the picture than he was aware of. The retail industry in Malaysia was notorious for buyers accepting money and gifts from suppliers. A few days ago, Chong had accidentally overheard two of his accounting employees speculating that Alam must be accepting gifts, or even taking bribes—how else could he get such good contracts? Chong was not sure what to do. Should he confront Alam? Or, to use one of his English colleague’s favorite expressions, should he let sleeping dogs lie? Chong knew that his boss expected him to aggressively grow the business, so perhaps it would be best to accept the mayor’s offer and deal with Alam later. Jextra Malaysia Jextra Stores, a large Asian retailer, was based in Hong Kong and was owned by Sim Lim Holdings, a large publicly traded industrial group. Sim Lim Holdings was traded on the Hong Kong and London stock exchanges. Jextra operated retail stores in Hong Kong, China, Philippines, Viet Nam, Malaysia, Thailand, and Singapore. The company operated supermarkets, hypermarkets, and convenience stores. Jextra entered Malaysia, a stable and prosperous nation of 28 million multi-ethnic people, in 2005 and was very successful. The company operated supermarkets in Malaysia using the name Neighbourhood Markets. There were now ten Neighbourhood Markets, and breakeven had been reached quickly. Jextra was planning to enter the Malaysian convenience store sector in a few years. Although other Asian and European retailers were entering Malaysia, Tom Chong saw plenty of growth opportunities for supermarkets, and his boss in Hong Kong had approved an aggressive five-year investment strategy. Tom Chong Tom Chong, a Hong Kong native, had been in his position for eight months, and expected to remain there for another two to three years. Malaysia was Chong’s first assignment as country manager. Prior to moving to Malaysia, Chong held various positions in corporate headquarters in Hong Kong, and then moved to Malaysia as finance director. After two years in finance, he moved into his current role as country manager for Neighbourhood Markets. His new assignment in Malaysia was his first experience with real operational issues and profit and loss responsibilities. Copyright © 2010 Thunderbird School of Global Management. All rights reserved. This case was prepared by Professor Andrew Inkpen for the purpose of classroom discussion only, and not to indicate either effective or ineffective management. This document is authorized for use only by Kayne Bubb in MGT1503 Spring 2015 taught by Yvonne Macrae, Northeastern University from April 2015 to October 2015. For the exclusive use of K. Bubb, 2015. Chong reported to a Regional Operating Officer responsible for Singapore, Malaysia, and Thailand, and was in constant contact with the CEO and the CFO of the Supermarket and Hypermarket Divisions of Jextra in Hong Kong. Chong was evaluated based on various financial measures, including Economic Value Added. As a country manager in a young market, the number of new stores opened was an important element in his overall evaluation, and a factor in determining his career prospects. In a fast-growing market like Malaysia, a failure to open new stores would be viewed negatively at corporate headquarters. The number of new stores opened would also be a factor in determining his discretionary bonus. In recent years, Chong’s performance had been among the best for Jextra managers of his age and experience. A New Store in Klang Jextra was doing well in Malaysia and actively seeking to expand. Chong and his team had identified a potential site in Klang for a new Neighbourhood Market. Klang, a town located about 30 km west of Malaysia’s capital, Kuala Lumpur, was growing and was viewed as an attractive location for a new store. Although the potential site was not zoned for retail and commercial purposes, it had good road access and plenty of space for parking. Chong knew that several other retailers were also interested in expansion in Klang, especially with the opening of a new highway connecting Klang to the southeastern edge of Kuala Lumpur. At a recent meeting between Chong and the mayor of Klang: Chong: As you know, we have identified Klang as one of the most attractive cities in Malaysia for Jextra investment. We are interested in opening a Jextra Neighbourhood Market there. Mayor: We are pleased that you are considering our city for your next investment. Klang is a growing community, and the new highway makes our city much more attractive as a place for families to live and commute to the capital. Where does your investment analysis stand? Chong: We have done some preliminary work. We have identified some potential sites. There is one site of interest near the new sports arena, and we have had some conversations with your officials since the land is currently not zoned for commercial use. Unfortunately, our previous investments in Malaysia have all encountered difficulty with land development. Our newest store was delayed by more than eight months because of zoning issues. We hope that will not be a problem in Klang. Mayor: We have a unique community in Klang, and want to protect our cultural heritage. We scrutinize all proposed real estate developments very carefully. With your store, perhaps we can help each other. Chong: Can you be more specific? Mayor: Our community is growing quite rapidly, and we have a lot of young families moving in. We desperately need a new primary school. Without it, families may choose to live elsewhere. People do not want to live in a city with inadequate school facilities. Unfortunately, our school budget is quite tight, and we may not be able to build the school for at least two years. If Jextra were willing to consider supporting a primary school development fund, I am sure I could speed up the land zoning process. Chong: Interesting….Can you tell me a bit more about the primary school project? Do you have any preliminary estimates of the cost? Mayor: My Director of Schools has told me that we need about 350,000 ringgit to make up a budget shortfall for a new primary school. Jextra’s support would greatly help the community. Also, if you were to build your store on the proposed site, road and electricity developments would be necessary. A flyover at the intersection of Jalan Mantin and Jalan Subang on the east side of the site would be necessary to ensure smooth traffic flow. We would, of course, expect 2 TB0249 This document is authorized for use only by Kayne Bubb in MGT1503 Spring 2015 taught by Yvonne Macrae, Northeastern University from April 2015 to October 2015. For the exclusive use of K. Bubb, 2015. Jextra to help pay for the flyover. I understand one of your competitors in Shah Alam [a community close to Klang] helped pay for a new fire truck when they entered the market. This is quite normal for new investment in Malaysia. Chong: Well, Mr. Mayor, thank you for your time. We will continue with our analysis, and certainly hope that we can do something that is good for Klang and good for Jextra. With that, Chong left the meeting. The conversation with the mayor had caught him by surprise. The mayor’s zoning proposal was unexpected, but could certainly speed up development. However, Chong was not sure what he asked for. Was he being asked to pay the entire 5 million ringgit or just a part of the cost? Would he pay for it before the primary school was built, or after? Would he pay the city or a contractor? If he said no, would that mean a denial of the zoning change? Chong made a few calls, and learned that the mayor’s sister was on the school board and was one of the major supporters of a new primary school. Chong also learned that planning for the flyover had started several months before Jextra had ever expressed an interest in the nearby site. In addition, Jextra had already determined that traffic to and from the store parking lot would be routed through the west side of the lot, using a lightly used commercial street and not on either of the roads close to the planned flyover. Chong wondered about the mayor’s motives in asking Jextra to pay for the flyover. Jextra Business Conduct Code Jextra’s Business Conduct Code was very clear: employees could not offer benefits to third parties in connection with business matters (see the Appendix for excerpts from the Code). If Jextra were to contribute to a primary school, the benefit would be a contribution to a school development fund, and the benefit would go to the school and the community, not individuals. Chong had discussed a hypothetical situation with a Malaysian friend who was also a lawyer (he did not reveal the specifics of the mayor’s request). He was told that Malaysian law was unclear in the area of business payments for social purposes made specifically for regulatory approval. He was also told that although not widespread in Malaysia, the practice of businesses contributing to city projects was common in Klang and other areas around Kuala Lumpur, and the local mayor prided himself on being able to obtain these payments for schools and roads in particular. Jextra’s corporate office in Hong Kong had a small group of employees that managed the Jextra Social Fund. The Jextra Social Fund provided funding for various social and educational programs, mainly in Hong Kong. One of the fund’s specific initiatives was providing university scholarships in Hong Kong for children of lower-income families. As Jextra expanded in Asia, the fund was slowly looking at ways to contribute to more local programs. However, Chong knew that recently there had been some concerns in the Philippines involving the Jextra Social Fund and some funds for a community center in a city in which Jextra planned to build a store. Chong did not know the details, but the rumors were that much of the money went to local politicians instead of the community center. Not long after the incident, Jextra’s country manager in the Philippines was transferred back to Hong Kong to a position that looked like a demotion. Legal in Malaysia? Chong thought that the primary school contribution could be illegal in Hong Kong if it circumvented the Jextra Social Fund. But, perhaps this was normal practice in Malaysia. Chong’s friend said that some local lawyers would probably advise him to make the payments, but to keep the school and flyover payments independent, which would blur the line as to whether the behavior was indeed illegal. Complicating the issue was the question of the expected outcome from the primary school payment. If the school payment speeded up the development process, it could be legal; if it was necessary to make the payment solely as a prerequisite to obtaining the permit, it could be considered a bribe. If the payment was made after the store was built and went directly to a school board budget for future operating expenses, would that be illegal? Chong did not know the answer to these questions. TB0249 3 This document is authorized for use only by Kayne Bubb in MGT1503 Spring 2015 taught by Yvonne Macrae, Northeastern University from April 2015 to October 2015. For the exclusive use of K. Bubb, 2015. Various scandals involving alleged bribes and corporate contributions had contributed to the recent “retirement” of various elected officials in Malaysia. Both state and federal politicians were using “clean government” as part of their political platforms. The State Investment, Trade and Industry Committee Chairman said that his government would separate itself from the historically tight ties between business, government, and political campaign contributions. At the federal level, the government had promised that foreign direct investment in Malaysia would become transparent, and that giveaways to foreign investors would stop (exactly what giveaways he meant were never specifically identified). Chong knew that, in the last year, there had been several foreign investors who were rumored to have helped fund different government programs in exchange for favorable treatment. So far, there was no evidence that any of these efforts were illegal or even of much interest to voters and legislators. When a European electronics company opened a new plant in Malaysia, there were many rumors that the company paid a substantial amount of money to a government “education fund.” Chong’s teammate from his football club told him confidentially that the company had paid 2.5 million ringgit to the fund, and that the fund was controlled personally by the Industry and Development Minister, a well-known businessman turned politician, whose wife was dean of the Communications School at the Malaysian Institute of Technology. Jextra’s Competitors and the Mayor’s Offer Chong was aware that Super-Value, one of Jextra’s competitors, was also actively looking at Klang for a new store. Would the mayor make the same offer to Super-Value as he had made to Jextra? If so, when would the offer be made, and would Super-Value be willing to accept it? Perhaps Super-Value was interested in the same site as Jextra. Before Chong could even consider agreeing to the mayor’s primary school request, he needed to think through the details. How would he get the money for the school? Would he identify it in the investment proposal, or try to hide it with other items? Should he get legal advice on his possible criminal liability in Hong Kong? What if he went ahead with the payment, and the money ended up not going to the school? If the press found out, Jextra and Chong could be in big trouble. Perhaps the best approach would be to decline the mayor’s offer and work through regular channels to get the zoning approval. If that was successful, he would worry about the flyover request later. On the other hand, he did not want to lose access to a prime retail site, and his boss, who was aware of the Klang site, wanted an update on the project next week. Category Management A very simplified view of Jextra’s category management and buying process is as follows. Category managers (CMs) were responsible for driving category direction and leading an operationally efficient category team to deliver the budget within the framework of the corporate goals. A key area of responsibility for category managers was working with suppliers to determine the products to order, together with their negotiating prices. For a new supplier, establishing a relationship with a category manager was crucial in getting its products listed by Neighbourhood Markets. Category managers negotiated contracts, rebates, equipment, placement, incentives, and other financial and logistical arrangement for their category. Neighbourhood Markets in Malaysia had category managers for product lines such as fruits and vegetables, meat, frozen foods, and beverages. Product buyers managed the bundling of orders and actual buying from suppliers at the negotiated prices. Over and above this organizational setup, there were few defined processes, leaving a fair amount of leeway to the category managers because they decided what to order and what not to order. Arif Alam Arif Alam was 32 years old, and had been with Jextra in Malaysia since the company entered the market. He had worked his way up from a sales apprentice position to category manager for fruits and vegetables. His responsibilities included building and managing contacts with suppliers, listing suppliers and products, negotiating prices, and working closely with buyers to ensure that the supplier relationship was smoothly managed. 4 TB0249 This document is authorized for use only by Kayne Bubb in MGT1503 Spring 2015 taught by Yvonne Macrae, Northeastern University from April 2015 to October 2015. For the exclusive use of K. Bubb, 2015. As Alam’s boss, Chong had a reasonable understanding of how the Malaysian buying process worked, but he did not know all the details, and certainly was not involved in day-to-day activities. What Chong had learned over the past few months was that there were ample opportunities for CMs to exploit the system for personal gain. One typical scheme involved company samples and rewards. Most suppliers provided CMs with a large supply of product samples that could be sold on the grey market. CMs and their spouses often traveled extensively to product presentations of certain suppliers. These events usually took place at luxury hotels, and often in resort settings. Since Alam was a CM for fruits and vegetables, he might be provided with other products, such as small appliances like toasters or coffeemakers. Another typical scheme was for suppliers to provide rewards tied to performance and sales. These could range from household appliances to expensive jewelry and watches. These rewards could be kept or sold. There were even cases where companies owned by relatives of CMs had to be paid by suppliers in order for the suppliers to get their products sold by Jextra. Besides his suspicions that Alam was accepting gifts, or even taking bribes, Chong had heard rumors about a scheme between Alam and his father-in-law. Alam referred suppliers willing to be listed for a new product to his father-in-law who, as a side job, ran a trading agency that “established contact to Jextra Stores.” The agency received a commission of 0.5 percent for all goods covered by the agency agreement. It was rumored that Alam rarely listed suppliers and products not covered by the agency. Bribery The bribery issue was particularly troubling. Bribery of retail buyers was as old as the retail industry itself. The bribery process works as shown in the following example. A buyer who paid 50 ringgit for a pair of blue jeans the previous year negotiates a 45 ringgit price based on a larger order. Another clothesmaker offers the same pants for 42 ringgit each. In order to retain the big order, the first vendor matches the 42 ringgit price and gives the buyer 2 ringgit for each pair of blue jeans. The bribe is undetectable, because the buyer sets up a phony company that serves as a middleman in the transaction. The vendor bills the retailer for 42 ringgit a pair and funnels the 2 ringgit to the buyer through the dummy corporation, calling it “an agency commission.” After the deal is done, the vendor keeps the order and the retailer pays less for the pants than a year ago. The buyer looks good because the price paid was lower than a year ago. The buyer believes, “I deserve the money because I am helping the company.” For a few years, the retailer may benefit by having lower costs. Longer term, the retailer’s costs may increase because the buyer has an obligation to the vendor and may end up paying less-competitive prices. The retailer may also end up with merchandise that is inferior in quality and difficult to sell because it was purchased by a corrupt buyer. Chong’s Decision Chong had a dilemma. Although he suspected that Alam was involved in “dirty” buying, how could he find out? His colleagues might know, but they could be involved in the same activities. Jextra was doing well and, as far as Chong knew, except for bribery, most of the behaviors were not criminal in Malaysia. What if he set up an investigation? If he found nothing, he could alienate his people and lose personal credibility. He might find that large parts of his product category management were engaged in similar actions. What should he do then? The whole business might be at risk if he were to shut it down. He could lose his top CMs and disrupt supplier relationships. Plus, how would he actually investigate the CMs—hire an outside investigator? Talk with suppliers? Find a disgruntled employee? Spy on his employees? This was all new to him. Proving any of his suspicions would be difficult. Alam was a respected member of the team. Aside from rumors and hearsay, Chong had no real evidence of bribery or kickbacks. Alam’s lifestyle did not seem out of the ordinary. Chong would need clear evidence, and an outside investigator would mean added cost. The investigation could take months, or even years, and Chong might be gone from Malaysia by the time the process was completed. In addition, this would take a lot of his time, and he was already working almost 60 hours a week. Chong needed to keep growing the business and meet his financial targets. It was critical for him to deal with the mayor’s proposal appropriately and ensure that Jextra’s chosen site did not end up with one of his competitors. Maybe he should wait before doing anything about Alam. TB0249 5 This document is authorized for use only by Kayne Bubb in MGT1503 Spring 2015 taught by Yvonne Macrae, Northeastern University from April 2015 to October 2015. For the exclusive use of K. Bubb, 2015. Appendix: Excerpts from Jextra’s Business Conduct Code Summary Jextra is an international company with a strong reputation for providing quality products. We continually seek to deliver the best results for the Company, the highest return to our shareholders, and the most beneficial service to our customers. Ethical conduct is defined as conduct that is morally correct and honourable. To maintain our valuable reputation and to build on our success, we must conduct our business in a manner that is ethical as well as legal. This Business Conduct Code establishes Jextra’s commitment to following ethical business practices. It details the fundamental principles of ethical business behaviour, and defines the responsibilities of all directors, officers, associates, and Company representatives. Jextra is committed to conducting business lawfully and ethically. Every associate is obligated to act at all times with honesty and integrity. We expect you to bring good judgment and a sense of integrity to all your business decisions. While it is not possible to list all policies and laws to be observed, or all conflicts of interest or prohibited business practices to be avoided, this Business Conduct Code details the company’s expectations for associate conduct, and helps associates make the right decisions. Associates are expected to know the company’s policies and comply with them. Applicability Associates who supervise others have an important responsibility to lead by example and maintain the highest standards of behaviour. If you supervise others, you should create an environment where employees understand their responsibilities and feel comfortable raising issues and concerns without fear of retaliation. If an issue is raised, you must take prompt action to address the concerns and correct problems that arise. You must also make sure that each associate under your supervision understands our Code and the policies, laws, and regulations that affect our workplace. Most importantly, you must ensure that employees understand that business performance is never more important than ethical business conduct. As a Jextra employee, you are expected to comply with both the letter and the spirit of our Code. This means you must understand and comply with all of the company policies, laws, and regulations that apply to your job, even if you feel pressured to do otherwise. Our Code also requires you to seek guidance if you have questions or concerns, and to cooperate fully in any investigation of suspected violations of the Code that may arise in the course of your employment. Bribery It is illegal to pay or receive a bribe intended to influence business conduct or behaviour. Our guideline goes beyond the standard set by the law, and prohibits any activity that creates the appearance of anything improper, anything that may embarrass the company, or anything that may harm our corporate reputation. No assets of the company or other funds may be used to bribe or influence any decision by an officer, director, employee, or agent of another company, or any governmental employee or official. It may be acceptable to entertain or provide minor gifts to guests or suppliers, as long as the expenses are reasonable, consistent with good business practices, and do not appear improper. Any gift, entertainment, or benefit provided must be modest in scope and value. You should consult with your supervisor if you have any questions about whether any gift-giving activity is appropriate. Never provide a gift, entertainment, or benefit that contravenes any applicable law or contract term or that is large enough to influence, or appear to influence, the recipient’s business decisions. Associates should not accept money, gifts, or excessive entertainment from any guest, contractor, or supplier at any time. For more information on gifts, entertainment, and related issues, see the Conflicts of Interest guidelines. International laws strictly prohibit giving, promising, or offering money, or anything else of value, directly or indirectly, to officials of foreign governments or foreign political candidates in order to obtain or retain business or any improper business advantage. Never give, promise, offer or authorize, directly or indirectly, any payments to government officials of any country. Conflicts of Interest Associates must avoid any situation in which their personal interests conflict with the interests of Jextra. If a circumstance arises in which your interests could potentially conflict with the interests of Jextra, it must be disclosed immediately to both your supervisor and Human Resources for review. Associates should be vigilant about recognizing potential conflicts. You must always consider whether your activities and associations with other individuals could negatively affect your ability to make business decisions in the best interest of the company or result in disclosing nonpublic company information. If so, you may have a real or perceived conflict of interest. Below is a list of potential conflicts of interest. • Owning a substantial amount of stock in any competing business or in any organization that does business with us. • Serving as a director, manager, consultant, employee, or independent contractor for any organisation that does business with us, or is a competitor—except with our company’s specific prior knowledge and consent. • Accepting or receiving gifts of any value or favours, compensation, loans, excessive entertainment, or similar activities from any individual or organization that does business or wants to do business with us, or is a competitor. • Taking personal advantage of a business opportunity that is within the scope of Jextra’s business—such as by purchasing property that Jextra is interested in acquiring. Related Party Transactions Employees and immediate family or household members may not serve as a supplier or customer of the Company, or otherwise engage in business dealings with the Company, without the written consent of a member of the Executive Management Team. You or a member of your immediate family or household may not accept business opportunities, commissions, or advantageous financial arrangements from a customer, supplier, or business partner of the Company. You may not purchase for personal use the goods or services of the Company’s suppliers on terms other than those available to the general public or established by Company policy. You may not take advantage of any business opportunity that you learn about in the course of your employment. 6 TB0249 This document is authorized for use only by Kayne Bubb in MGT1503 Spring 2015 taught by Yvonne Macrae, Northeastern University from April 2015 to October 2015. ...
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