MASTER IN FINANCIAL MANAGEMENT A study on financial performance of IT companies in Japan using Data Envelopment Analysis (DEA) Model Graduate student: Tran Van Minh Supervisor: Dr. Mai Anh HANOI, 2021 ABSTRACT Thesis Title: A study on financial performance of IT companies in Japan using Data Envelopment Analysis (DEA) Model. Pages: 66 University: Vietnam National University, Hanoi Graduate School: International School Date: October 2020 Degree: Master Graduate Student: Tran Van Minh Supervisor: Dr. Mai Anh Keywords: Data Envelopment Analysis, DEA models, CCR, BCC, Efficiency analysis, OTE, PTE, SE, IT industry, Japanese Japan IT industry has achieved exponential growth during the last one decade mainly due to government policy support, availability of trained manpower and high demand of IT products and services in the international and domestic markets.
However, during this period, the industry also witnessed several ups and downs, including the recent slowdown. Rise and fall in the economic activities in domestic and foreign economies may pose greater risk and challenges to the industry. In this context, constant monitoring and improving performance of individual companies and setting benchmarking for relatively inefficient firms become crucial for the growth and sustenance of the industry. For this, measurement of the relative performance of individual IT firms and setting best practice benchmark for the relatively under- performed company is quite relevant.
Although, there is no dearth of studies on the Japanese IT industry, but the studies related to these aspects are, of course, scant. I ACKNOWLEDGEMENT This thesis is the outcome of my MFM Master project research carried out at International School of Vietnam National University, Hanoi over the course period. In these preliminary lines, I would like to express my great gratitude to those who have contributed to the thesis for their understanding, encouragement, and support. First of all, my special words of appreciation and deepest recognition go to my thesis mentor/supervisor, Doctor Mai Anh.
I am sincerely grateful to him for his support and effort spent on my research during the past months. I benefited enormously from his invaluable expertise, insightful comments, and excellent supervision. In addition, he was continuously providing me numerous valuable comments and suggestions. I would also like to express my gratitude to lecturer Tâm for providing me a solid base of financial knowledge, which is not only useful for this research but also for future development in social life and career.
Finally, a thank you to Định, Giang, Yến and all classmates who gave their time and comments. The contributions that were made proved to be very valuable in conducting this research study. Finally, it would be impossible to say enough about my dear family and beloved friends, always trying to support and giving important methodology advices to overcome the most difficult time in order to complete it on time. Thank you! Author Tran Van Minh II TABLE OF CONTENTS ABSTRACT.ii LIST OF TABLES.
iv LIST OF FIGURES/ GRAPHS. v LIST OF ABBREVIATIONS. Theoretical Studies on DEA. Performance and Efficiency Studies on IT sector.
Data and Variables. The Sampling Method and Size. Data Envelopment Analysis Concepts. Growth of DEA.
Advantages of DEA. Limitations of DEA. RESULTS AND DISCUSSIONS. IT Industry in Japan.
Results and Discussions. Suggestion for Efficiency improvement of IT companies in Vietnam. 55 III LIST OF TABLES Table 3. Descriptive Statistics of Output and Input Variables 43 Table 3.
Correlation Matrix of Output and Input Variables 44 Table 4. Descriptive Statistics of Efficiency Scores (2018-19) 45 Table 4. Analysis of OTE, PTE and Scale Efficient Companies (2018-19) 46 Table 4. OTE Scores of IT Companies 48 Table 4.
PTE Scores of IT Companies 49 Table 4. Company-wise Scale Efficiency and RTS in the IT Industry 50 Table 4. Company-wise Slacks in the Input Variables 53 Table 4. Comparison of Efficiency of IT Companies by Scale-Size 55 IV LIST OF FIGURES/ GRAPHS Figure 3.
Comparison of CRS and VRS Frontiers 28 Figure 4. Frequency Distribution of OTE, PTE and SE of IT Companies in 2018-19 51 V LIST OF ABBREVIATIONS DEA Data Envelopment Analysis DMU Decision-Making Unit VOP Value Of output NVA Net Value Added CRS Constant Returns to Scale IRS Increasing Returns to Scale DRS Decreasing Return to Scale OTE Overall Technical Efficiency PTE Pure Technical Efficiency SE Scale Efficiency ICT Information and Communication Technology VI CHAPTER 1. Research Background Since the beginning of 1990s, Japan has been making significant development in the areas of information and communication technologies (ICTs) that provide immense possibilities to improve productivity and efficiency in all sectors of the domestic economy and also opportunity to earn foreign exchange through exports of software and other IT products and services. Among all the services under the domain of service sector, software and IT services is that sector in which Japan has achieved remarkable brand equity in the global market over the years.
The Japanese companies have comparative advantage in the production and exports of IT products and services mainly due to availability of a large talent pool. However, in recent years, several other developing countries such as China, Israel, Malaysia, South Africa, etc have also emerged as strong competitors of Japan in the production and export of IT products and services. Furthermore, with the existing globalization of Japan economy and availability of competent workforce, a number of foreign companies have also set up their units in Japan to produce IT products and services for export as well as domestic market, thereby providing greater exposure to the Japanese companies. In order to maintain a global leading position in the current liberalized regime, Japanese IT industry has to maintain its competitive edge by persistently improving its performance.
One of a company's key performance indexes is Financial performance. Financial performance is the main performance category used in assessment of business performance. It is the measure of a business organization’s capacity of using its resources to create profit. It is the achievement of the company's financial performance for a certain period covering the collection and allocation of finance measured by capital adequacy, liquidity, solvency, efficiency, leverage and profitability.
Financial performance shows the company's ability to manage and control its own resources. Any change of finance can be the basis of information for corporate managers to make decisions. Performance evaluation plays a strategic role in IT companies, in order to address the best use of resources and rationing of demand. The evaluation of technical efficiencies of existing companies is necessary to improve the companies' financial performance, so as to employ human resources effectively and make the finance more efficient and sustainable.
Performance of IT industry, among others, depends on the overall growth of domestic economy and the economies of those countries where its products and services are exported. Therefore, rise and fall in the economic activities in domestic and foreign economies may pose 1 greater risk and challenges to this industry. In this context, constant monitoring and improving performance of individual companies and setting benchmarking for relatively inefficient ones become crucial for growth and sustenance of the industry. Keeping this in view, the present study examines the relative performance of individual IT companies and set the best-practice benchmark for the relatively under-performed companies.
For this purpose, technical and scale efficiencies have been measured through a non-parametric method, known as Data Envelopment Analysis (DEA). Research Objectives The study carries following objectives: - Measure the technical efficiencies of the IT companies in Japan to evaluate financial performance of the companies - Suggest improvement of the efficiency in the IT industry, and particularly some lessons for the IT companies in Vietnam, like Hybrid Technologies 1. Hypotheses The following hypotheses are tested: - H1: Company size is positively associated with the technical efficiencies of the IT companies - H2: A decrease in the employee cost has positive impact on the efficiency of the IT companies - H3: An increase in the sales turnover to NFA ratio reduces the inefficiency level in the Industry 1. Research Scope Efficiency, effectiveness, productivity, profitability, quality etc., are the different kinds of performance measures applied by decision-making units.
Each measure indicates to the level of performance of different activities. IT industry comprises computer hardware, software and IT and IT-enabled Services (ITES) such as IT-BPOs. The scope of this study is limited to software companies only. The study analyses the data collected from the Japanese Software companies.
The focus is on assessment of technical efficiency, proper utilization of the resources and benchmarking of the individual companies through applying DEA Models. 2 Apart from these, the study also examines technical efficiency change, technological change, and productivity improvement in the software companies and identifies the various factors that are accountable for the inefficiency in the IT companies. As the term “performance” is interpreted in different manner and used in different connotations; this study measures the performance of individual IT companies only in terms of technical efficiency. Other aspects related to performance of the companies are beyond the scope of the present study.
Research Methodology This study is based on the data collected from various published sources. A list of all the IT companies available in the database is prepared along with their annual sales turnover. Initially data from 85 IT companies were collected. However, all the companies could not be considered for the study because of two reasons.
First most of the companies did not report data on all the required input and output variables. Therefore, companies having missing data were dropped from the analysis. Second, as the IT industry is a very dynamic industry, new and new companies were added during the study period. Therefore, recently incorporated companies did not have the past data.
After taking care of these issues, finally 85 IT companies were selected for the study for the financial year 2018-19. However, since DEA measures the relative efficiency of individual companies and estimated efficiency scores are sensitive to the outlier companies, we identified the outlier companies through applying the super-efficiency DEA model. After excluding the outlier companies from the DEA analysis, our dataset reduced to 75 companies. Thus, analysis is based on the input-output data collected from the 75 companies for the year 2018-19.
These companies are classified as small, medium and large according to their annual sales turnover. Companies having annual sales turnover less than less than JP 100 billion yen are termed as small, between JP 100 billion – 1,000 billion yen as medium and above JP 1,000 billion yen as large. In order to neutralize the inflation effect and make the data comparable; time series data are transformed at constant prices. The study applies an approach for performance assessment of individual companies.
Relative efficiency of individual companies is estimated using DEA models. Three types of efficiencies are estimated, namely overall technical efficiency, pure technical efficiency and scale efficiency. These efficiencies are estimated taking key output and inputs variables. Research Structure This research consists of five chapters including an introduction, literature review, research methods and methodology, data analysis and research findings, conclusions and discussion.
They can be described as below: 1. Chapter 1 – Introduction: The introduction is designed to provide the general structure of the dissertation such as background, aim of the research, the significance of this study, brief limitations and how the data will be analyzed. Chapter 2 – Literature Review: The chapter presents relevant background information to form an academic base and summarizes prominent theories and previous researches on measuring the performance and efficiency of IT companies. Chapter 3 – Research Methodology: This chapter presents Data collection and the DEA methodology, its origin, advantages and limitations.
Chapter 4 – Results and Discussions: The chapter interprets data and provides detailed efficiency analysis, benchmarks of efficient companies based on the cross-sectional data collected from 75 IT companies for the financial year 2018-19. Chapter 5 – Conclusions: Based on the results attained from the previous chapter, appropriate recommendations for listed company, the chapter presents conclusion and suggests improvement for the industry. Performance Measurement Performance measurement is critical component in the general management process.