EFFECT OF INFLATION ON THE PERFORMANCE OF LARGE SCALE INDUSTRIES: A CASE STUDY OF BIDCO (U) LTD

ABSTRACT

The study was carried out in Bidco (u) ltd located in Walukuba – Masese road in Jinja, Uganda about 5km away from Jinja Town with the purpose of determining the effect of inflation on the performance of large scale industries. The specific objectives of the study were; to determine the forms and causes of inflation, to examine the effect of inflation on profitability of large scale industries and to establish other factors that affect the profitability of large scale industries.

The study adopted a descriptive research design where both qualitative and quantitative approaches of data collection were adopted on a sample of 50 respondents using purposive and simple random sampling. Data was analysed using descriptive statistics and presented inform of tables and figures.

The study found out that the major forms of inflation include; open inflation 50(100%), while 40(80%) of the respondents cited walking inflation, 39(78%) moderate inflation, 35(70%) of the respondents revealed galloping inflation and 50(100%) cit4ed hyperinflation. The main causes of inflation according to study findings included excess money in circulation since 40(80%) of the respondents agreed, 50(100%) of the respondents revealed higher indirect taxes, also 50(100%) cited depreciation of the exchange rate. The study also found out that inflation affects profitability as 35(70%) of the respondents agreed with increasing input prices reduces profits for large scale industries, also 50(100%) revealed wage increases increase the tax base, 50(100%) said inflation also brings low rate of return on assets and 40(80%) of the respondents mentioned that lower rates of return discourage savings. The study found out that the other factors that affect the profitability of large scale industries included the degree of competition a firm faces as 40(80%), 50(100%) mentioned the state of the economy, also 50(100%) cited advertising and 50(100%) revealed management.

It was concluded that inflation affects the profitability of most industries in countries where it hits. Therefore the government should put up strict laws and regulations to minimize inflation in the country so that organizations can increase on their performance.

The study also recommends that the government should focus on setting policies to increase competitiveness and efficiency of the economy putting downward pressure on long-term costs. Also, the government should increase taxes (such as income tax and VAT) and cut spending. This improves the budget situation and helps to reduce demand in the economy.

CHAPTER ONE

1.0 Introduction

This chapter presents the background to the study, the statement of the problem, general and specific objective of the study, research questions, scope of the study, and significance of the study.

1.1 Background of the Study

According to Santoni (1986), inflation depreciates the value of money such that a percentage increase in inflation results into a similar percentage fall in value of the country’s currency. Broadly, inflation theorists attribute inflation to monetary causes and mal adjustments in economic system (Chand, 2008). For example, the performance of commercial banks has been a considered issue in the developing countries. This phenomenon is attributed to the crucial role of the commercial banks in the economy. Further, the performance of banking is important to depositors, owners, potential investors and policy makers as banks are the effective executors of monetary policy of the government (Mian et al., 2013). This suggests that the volumes of bank lending may partly depend on the performance of commercial banks.

Inflation is generally the persistent increase of price level of goods and services in an economy over a period of time. When price level rises, each unit of currency buys fewer goods and services (Boyd and Champ, 2004). Performance of a business, that is how well or poorly a business is doing versus owner- manager set objectives is crucial to business success. Once a business is not performing well, certain danger signals such as poor profit growth will manifest. Murray (1994) argues that “many large scale enterprises owners either do not understand the significance of these warnings or tend to optimistically believe that things will get better on their own”.

Larger corporations are generally better positioned to benefit from inflation, as it can be offset by savings generated by economies of scale. Small firms, however, often take a direct hit on margin. High inflation can also have unexpected side effects: it can negatively affect currency exchange rates and bring about an export slump. Falling input prices, together with decreasing interest rates on loans, have relieved the pressure on industries balance sheets, but wage increases are now creeping up, adding to the cost base.

Taner (2000) study on the effects of inflation uncertainty on credit markets reveals that unpredictable inflation raises interest rates, decreases loan supply and affect loan demand. This therefore suggests that an increase in inflation may raise the bank lending rates and lead to low bank lending volumes. Emon (2012)confirms this assertion and states that lenders are very aware that inflations erodes the value of their money over the time period of a loan, so they increase the interest rates to compensate for the loss. The increased interest rates may therefore influence the borrowing patterns for any commercial bank. This also suggests that there is a positive relationship between the inflation rates and the lending rates even though the extent to which one affects the other for different time periods is not certain. This study will therefore strive to determine the effect of inflation on the performance of large scale industries.

1.2 Problem statement

Rise in production cost is one of the consequences of inflation, as firms‟ increase the prices or their final products (Keeley, 2001).This happens when there is an increase in prices of the raw materials, and firms are forced to increase prices in order to meet or maintain their profit margins or in the event a rising labour cost. Inflation can also result from international lending and national debts, in this case countries that have borrowed money have to their interest rates in order to keep the debt obligation (Stiglitz, 2004).

Increase in inflation affects the operations of most large industries for instance banks increase interest rates as inflation increases otherwise real interest rate will be negative. This makes borrowing costly for both consumers and corporate. Thus people will buy fewer automobiles, houses and other goods. Industries will not borrow money from banks to invest in capacity expansion because borrowing rates are high (Abel, 2005). Despite interventions to reduce inflation, large scale industries still face challenges in their operations such as rise in production cost which has prompted them to increase the prices on their products, thus their performance has not been persistent in terms of profits, return on investment, market share due to a decrease in purchasing power. This study therefore sought to determine the effect of inflation on the performance of large scale industries.

1.3 Purpose of the study

The study determined the effect of inflation on the performance of large scale industries. A case study of Bidco (u) ltd.

1.4 Specific Objectives

1. To determine the forms and causes of inflation
2. To examine the effect of inflation on profitability of large scale industries

• To establish other factors that affect the profitability of large scale industries

1.5 Research Questions

1. What are the forms and causes of inflation?
2. What is the effect of inflation on the profitability of large scale industries?

• What other factors affect the profitability of large scale industries and solutions to the challenges?

1.6 Scope of the study

The study determined the effect of inflation on the performance of large scale industries. The study was carried out in Bidco (u) ltd located in Walukuba – Masese road in Jinja, Uganda about 5km away from Jinja Town. The study considered 2000-2016 as the period of data to be considered.

1.7 Significance of the study

The findings of the study will be relevant to the management of Bidco (U) ltd (strategic and operational plans) in that it will give the milestones towards growth and performance.

The study would therefore help policy makers understand how the inflation rate fluctuation pattern is affecting the organizations overall performance thus prompt the senior management to look into ways of navigating it either through policy change in order to maximize their earnings.

The findings of the study may also serve as a benchmark to other organizations who are affected by inflation. It will enable them to better understand the effects of inflation on performance and use study recommendations to improve on their performance.

Further researchers was alsonefit from the findings of this study since it will provide additional knowledge to the already existing literature on Inflation and performance of large scale industries. The findings and gaps of this study may act as ground for further research.

CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This chapter presents a review of literature on the topic of effects of inflation on the performance of large scale industries. It will be presented basing on set objectives.

2.2 Overview of Inflation

Inflation’s effects on an economy are various and can be simultaneously positive and negative. Negative effects of inflation include a decrease in the real value of money and other monetary items over time, uncertainty over future inflation may discourage investment and savings, and high inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future. Positive effects include ensuring central banks can adjust nominal interest rates (intended to mitigate recessions), and encouraging investment in non-monetary capital projects (Taner, 2000).

Boyd and Champ (2004) economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time (Chowdrury, 2012).

Taner (2000) inflation is a state of generally rising prices and falling value of money. Inflation is a persistent and appreciable rise in the general level of prices (Liu, t al, 2000). While by inflation exists when money income is expanding more than the amount of goods and services (Gavin, 2005).

Today, most mainstream economists favor a low, steady rate of inflation. Low (as opposed to zero or negative) inflation may reduce the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduce the risk that a liquidity trap prevents monetary policy from stabilizing the economy. The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control the size of the money supply through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements (Gavin 2005).

2.2 Forms and Causes of Inflation

2.2.1 Forms of inflation

There are several forms of inflation, among which include the following;

Open Inflation: When government does not attempt to restrict inflation, it is known as Open Inflation. In a free market economy, where prices are allowed to take its own course, open inflation occurs (Denish, 2015).

Suppressed Inflation: When government prevents price rise through price controls, rationing, etc., it is known as Suppressed Inflation. It is also referred as Repressed Inflation. However, when government controls are removed, Suppressed inflation becomes Open Inflation. Suppressed Inflation leads to corruption, black marketing, artificial scarcity, etc (Basnet, 2015).

Creeping Inflation: When prices are gently rising, it is referred as Creeping Inflation. It is the mildest form of inflation and also known as a Mild Inflation or Low Inflation. According to R.P. Kent, when prices rise by not more than (up to) 3% per annum (year), it is called Creeping Inflation (Basnet, 2015).

Chronic Inflation: If creeping inflation persist (continues to increase) for a longer period of time then it is often called as Chronic or Secular Inflation. Chronic Creeping Inflation can be either Continuous (which remains consistent without any downward movement) or Intermittent (which occurs at regular intervals). It is called chronic because if an inflation rate continues to grow for a longer period without any downturn, then it possibly leads to Hyperinflation (Denish, 2015).

Walking Inflation: When the rate of rising prices is more than the Creeping Inflation, it is known as Walking Inflation. When prices rise by more than 3% but less than 10% per annum (i.e. between 3% and 10% per annum), it is called as Walking Inflation. According to some economists, walking inflation must be taken seriously as it gives a cautionary signal for the occurrence of running inflation. Furthermore, if walking inflation is not checked in due time it can eventually result in Galloping inflation (Basnet, 2015).

Moderate Inflation: Prof. Samuelson clubbed together concept of Crepping and Walking inflation into Moderate Inflation. When prices rise by less than 10% per annum (single digit inflation rate), it is known as Moderate Inflation. According to Prof. Samuelson, it is a stable inflation and not a serious economic problem (Basnet, 2015).

Running Inflation: A rapid acceleration in the rate of rising prices is referred as Running Inflation. When prices rise by more than 10% per annum, running inflation occurs. Though economists have not suggested a fixed range for measuring running inflation, we may consider price rise between 10% to 20% per annum (double digit inflation rate) as a running inflation (Denish, 2015).

Galloping Inflation: According to Prof. Samuelson, if prices rise by double or triple digit inflation rates like 30% or 400% or 999% per annum, then the situation can be termed as Galloping Inflation. When prices rise by more than 20% but less than 1000% per annum (i.e. between 20% to 1000% per annum), galloping inflation occurs. It is also referred as Jumping inflation. India has been witnessing galloping inflation since the second five year plan period (Basnet, 2015).

Hyper Inflation: Hyperinflation refers to a situation where the prices rise at an alarming high rate. The prices rise so fast that it becomes very difficult to measure its magnitude. However, in quantitative terms, when prices rise above 1000% per annum (quadruple or four digit inflation rate), it is termed as Hyperinflation. During a worst case scenario of hyperinflation, value of national currency (money) of an affected country reduces almost to zero. Paper money becomes worthless and people start trading either in gold and silver or sometimes even use the old barter system of commerce. Two worst examples of hyperinflation recorded in world history are of those experienced by Hungary in year 1946 and Zimbabwe during 2004-2009 under Robert Mugabe’s regime (Denish, 2015).

2.2.2 Causes of Inflation

Abel (2005), there are many causes for inflation, depending on a number of factors. For example, inflation can happen when governments print an excess of money to deal with a crisis. As a result, prices end up rising at an extremely high speed to keep up with the currency surplus. This is called the demand-pull, in which prices are forced upwards because of a high demand.

Inflation can also be caused by international lending and national debts. As nations borrow money, they have to deal with interests, which in the end cause prices to rise as a way of keeping up with their debts. A deep drop of the exchange rate can also result in inflation, as governments will have to deal with differences in the import/export level (Daniels, 2009).

According to Stiglitz (2004), inflation can be caused by federal taxes put on consumer products such as cigarettes or fuel. As the taxes rise, suppliers often pass on the burden to the consumer; the catch, however, is that once prices have increased, they rarely go back, even if the taxes are later reduced. Wars are often cause for inflation, as governments must both recoup the money spent and repay the funds borrowed from the central bank. War often affects everything from international trading to labor costs to product demand, so in the end it always produces a rise in prices.

2.2.1. Cost push inflation

Cost-push inflation occurs when businesses respond to rising production costs, by raising prices in order to maintain their profit margins. There are many reasons why costs might rise.

Rising imported raw materials costs perhaps caused by inflation in countries that are heavily dependent on exports of these commodities or alternatively by a fall in the value of the national currency of country in the foreign exchange markets which increases the country price of imported inputs. A good example of cost push inflation was the decision by British Gas and other energy suppliers to raise substantially the prices for gas and electricity that it charges to domestic and industrial consumers at various points during 2005 and 2006 (Plosser, 2008).

According to Stiglitz (2004), rising labour costs caused by wage increases which exceed any improvement in productivity. This cause is important in those industries which are ‘labour-intensive’. Firms may decide not to pass these higher costs onto their customers (they may be able to achieve some cost savings in other areas of the business) but in the long run, wage inflation tends to move closely with price inflation because there are limits to the extent to which any business can absorb higher wage expenses.

Higher indirect taxes imposed by the government, for example a rise in the rate of excise duty on alcohol and cigarettes, an increase in fuel duties or perhaps a rise in the standard rate of Value Added Tax or an extension to the range of products to which VAT is applied. These taxes are levied on producers (suppliers) who, depending on the price elasticity of demand and supply for their products, can opt to pass on the burden of the tax onto consumers. For example, if the government was to choose to levy a new tax on aviation fuel, then this would contribute to a rise in cost-push inflation (Denis, 2015).

Cost-push inflation can be illustrated by an inward shift of the short run aggregate supply curve. This is shown in the diagram below. Ceteris paribus, a fall in SRAS causes a contraction of real national output together with a rise in the general level of prices (Denis, 2015).

Inflation

SRAS₂                                                         AD

SRAS₁

                                                                        Y₂   Y₁            Real National Income

Source: Denish (2005), Macroeconomics

2.2.2. Demand pull inflation

Denis (2015), demand-pull inflation is likely when there is full employment of resources and when SRAS is inelastic. In these circumstances an increase in AD will lead to an increase in prices. AD might rise for a number of reasons, some of which occur together at the same moment of the economic cycle. In the above diagram the SRAS curve is drawn as non-linear. In the second, the macroeconomic equilibrium following an outward shift of AD takes the economy beyond the equilibrium at potential GDP. This causes an inflationary gap to appear which then triggers higher wage and other factor costs. The effect of this is to cause an inward shift of SRAS taking real national output back towards a macroeconomic equilibrium at Yfc but with the general price level higher than it was before.

The depreciation of the exchange rate, which has the effect of increasing the price of imports and reduces the foreign price of a country exports. If consumers buy fewer imports, while foreigners buy more exports, AD will rise. If the economy is already at full employment, prices are pulled upwards (Denish, 2015).

The reduction in direct or indirect taxation. If direct taxes are reduced consumers have more real disposable income causing demand to rise. A reduction in indirect taxes will mean that a given amount of income will now buy a greater real volume of goods and services. Both factors can take aggregate demand and real GDP higher and beyond potential GDP (Abel, 2005).

Emon (2012), the rapid growth of the money supply perhaps as a consequence of increased bank and building society borrowing if interest rates are low. Monetarist economists believe that the root causes of inflation are monetary in particular when the monetary authorities permit an excessive growth of the supply of money in circulation beyond that needed to finance the volume of transactions produced in the economy.

The rising consumer confidence and an increase in the rate of growth of house prices both of which would lead to an increase in total household demand for goods and services (Chand, 2008). The faster economic growth in other countries, providing a boost to exports overseas. Higher prices following an increase in demand lead to higher output and profits for those businesses where demand is growing. The impact on prices is the greatest when SRAS is inelastic (Daniels, 2009).

2.3 Relationship between inflation and profitability of large scale industries

Rise in production cost is one of the consequences of inflation, as firms‟ increase the prices or their final products (Keeley, 2001).This happens when there is an increase in prices of the raw materials, and firms are forced to increase prices in order to meet or maintain their profit margins or in the event a rising labour cost. Inflation can also result from international lending and national debts, in this case countries that have borrowed money have to their interest rates in order to keep the debt obligation (Stiglitz, 2004).

Nicholas (2011) further notes that inflation reduces the purchasing power of money, inflation and the expectation that it will continue causes lenders to demand higher interest rates on loans. This is because lenders want to be compensated, not only for sacrificing the use of their money and assuming a risk in lending, but also for the expected decline in the purchasing power of their money during the life of the loan. In addition, there is a tendency for borrowers, also expecting the value of the money to decline before they repay the loan, to be willing to pay higher rates to borrow money. The willingness to pay higher rates to borrow is reinforced if the borrower uses the money to buy something that is apt to increase in value with the inflation (such as a house). Therefore, inflation and inflationary expectations can press base rates upward.

Consequently, inflation results into a reduction in the purchasing power per unit of money, a loss of real value in the medium of exchange and unit of account within the economy (Boyd and Champ, 2004).They further observes that high inflation rates are caused by excessive growth of money supply in the economy compared to the rate of economic growth, a lower rate of inflation is thus favored since it reduces severity of economic recessions by enabling the labor market to adjust more quickly in a down turn. The chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the consumer price index) over time, The consumer price index measures movements in prices of a fixed basket of goods and services purchased by a typical consumer, The inflation rate is the percentage rate of change of a price index over time.

Plosser (2008) notes that the lower the inflation, the lower the nominal interest rates. The Author presents data suggesting that the average real short-term interest rate over an economic cycle positively correlate with the level of inflation for a variety of developed economies over the last decade or so. He further points out a number of factors that might account for this relationship, including a reduction in macro-economic volatility, reduced tax wedge between real and nominal interest rates at lower levels of inflation and finally a reduction in the risk premium.

According to Boyd and Champ (2004), undertaking study on how inflation, affects banking and economic growth notes that one way inflation may affect the banking sector is by reducing the amount of credit that is available to business, inflation reduces the real rate of return on assets .Lower rates of return discourage savings but tend to encourage borrowings .the new borrowers entering the market are likely to be of lesser quality and more likely to default on their loans. Banks are then forced to react to these effects of lower real returns on their loans and an influx of less credit worthy borrowers by rationing credit that is restrict the quantity of loans made, simply by setting a higher lending rate .They further notes that inflation only affects rationing when it rises above some critical level.

Beck et al. (2013) carried a study on bank lending in an economy in relation to inflationary changes within an economy, noted that inflation affects banking lending rates even at low relatively low inflation rates. They further noted that even after controlling other variables constant in a multivariate statistical analysis, we still found significant negative relationship between inflation and banking lending size.

2.4 Other factors that affect profitability of large scale industries

The essence of profitability is a firms revenue – costs with revenue depending upon price and quantity of the good sold (Beck et al., 2013). These factors all determine the profitability of firms;

The degree of competition a firm faces. If a firm has monopoly power then it has little competition. Therefore demand will be more inelastic. This enables the firm to increase profits by increasing the price. For example, very profitable firms, such as Google and Microsoft have developed a degree of monopoly power, with limited competition. However, in theory, government regulation may prevent monopolies abusing their power, e.g. the OFT can stop firms colluding (to increase price) Regulators like OFGEM can limit the prices of gas and electricity firms (Levich, 2001). If the market is very competitive, then profit will be lower. This is because consumers would only buy from the cheapest firms. Also important is the idea of contestability. Market contestability is how easy it is for new firms to enter the market. If entry is easy then firms will always face the threat of competition; even if it is just “hit and run competition” – this will reduce profits (Jonan, 2009).

The strength of demand. For example, demand will be high if the product is fashionable, e.g. mobile phone companies were profitable during the period of rising demand and growth in the market. Products which have falling demand like Spam (tinned meat) will lead to low profit for the company. Some companies, like Apple, have successfully carved out strong brand loyalty making customers demand many of the new Apple products (Hellene, 2007). However, in recent years, profits for mobile phone companies have fallen because the high profit encouraged over supply, negating the increase in demand (Bill, 2008).

The state of the economy. If there is economic growth then there will be increased demand for most products especially luxury products with a high-income elasticity of demand. For example, manufacturers of luxury sports cars will benefit from economic growth but will suffer in times of recession (Castle, 2006).

Advertising. A successful advertising campaign can increase demand and make the product more inelastic demand. However, the increased revenue will need to cover the costs of the advertising. Sometimes the best methods are word of mouth. For example, it was not necessary for YouTube to do much advertising (Bill, 2008).

Substitutes, if there are many substitutes or substitutes are expensive then demand for the product will be higher. Similarly, complementary goods will be important for the profits of a company (Levich, 2001).

Relative costs. An increase in costs will decrease profits; this could include labour costs, raw material costs and cost of rent. For example, a devaluation of the exchange rate would increase the cost of imports, and therefore companies who imported raw materials would face an increase in costs. Alternatively, if the firm is able to increase productivity by improving technology then profits should increase. If a firm imports raw materials the exchange rate will be important. A depreciation making imports more expensive. However, a depreciation of the exchange rate is good for exporters who will become more competitive (Levich, 2001).

Management. Successful management is important for the long-term growth and profitability of firms. For example, poor management can lead to a decline in worker morale, which harms customer service and worker turnover. Also, firms may suffer from taking wrong expansion plans. For example, many banks took out risky sub-prime mortgages, but this led to large losses. Tesco suffered from expanding into unrelated business, like garden centre. This led to over-stretching the company and losing sight of their core-business (Levich, 2001).

2.5 Conclusion

There is no single theory for the cause of inflation that is universally agreed upon by economists and academics, but there are a few hypotheses that are commonly held as elaborated above. Inflation greatly affects the profitability of most industries as seen above and the essence of profitability is a firm’s revenue – costs with revenue depending upon price and quantity of the good sold, several factors that determine the profitability of firms have also been explained above.

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

This chapter discusses the research design, data type and sources, simple size and selection, data collection tools/methods, data presentation and analysis, data collection procedure and limitation of the study.

3.2 Research Design

A descriptive research design was used where both quantitative and qualitative approaches of data collection was employed. Descriptive research design was also used because it is effective to analyse non-quantified topics and issues, the possibility to observe the phenomenon in a completely natural and unchanged natural environment and the opportunity to integrate the qualitative and quantitative methods of data collection which other designs do not provide.

3.3 Data type and sources

Data was collected from both primary and secondary source.

Primary data was collected by use of questionnaires and interview guide.

Secondary data was collected from published journals, reports, text books, and company records.

3.4 Sample Size, Selection and Procedure

The sample size was 50 respondents. The sample size was determined using Sounders Lewis and Thornhill method of sample size determination using the formula given by;

n= {(Z_ß/2)² PQ}/U^2;

Where Z_{ß/2   =} the standard normal value

n = the sample size,

P = the estimated population proportion,

Q = 1-P and

U = the maximum allowable error.

Taking Z_{ß/2 =0.025} as 1.96 at 95% confidence level, assuming that,

P=80% and Q=1-80% =20%

U=10% and Z_{ß/2 =0.025} =1.96

Then from n= {(Z_ß/2)² PQ}/U²;

n= {(1.96)² *0.8*0.2}/(0.1)^2;

n=50.070784

This gave the researcher a sample of approximately 50 respondents

The study used purposive sampling method because it is one of the most cost-effective and time-effective sampling methods available and it also helps in exploring anthropological situations where the discovery of meaning can benefit from an intuitive approach.

The study also used simple random method to reduce on the biasness of the purposive data and mainly used on clients because it is free of classification error, and it requires minimum advance knowledge of the population other than the frame, also makes it relatively easy to interpret data collected in this manner.

3.5 Data collection methods and procedures

The study involved use of questionnaires and interview method.

The questionnaire was used because it is practical, also large amounts of information can be collected from a large number of people in a short period of time and in a relatively cost effective way, can be carried out by the researcher or by any number of people with limited affect to its validity and reliability.

The interview method was used because any misunderstanding and mistake can be rectified easily in an interview. Interview method can help to collect the fresh, new and primary information as needed.

3.6 Data management, presentation and analysis

This included all measures put in place to ensure that quality data is obtained. The management included data editing before leaving the area of study to ensure that there are no mistakes or areas left blank and if any mistakes are found they was corrected before leaving the field. The researcher also coded the interview and stored them in the file for safety and locked in a place which can only be accessed by the researcher.

All data collected was edited to check for its completeness and accuracy. Data was
compiled, sorted, classified, coded and carefully entered into the computer for analysis
purposes using Statistical Package for Social Scientists (SPSS). The quantitative data was analyzed using descriptive statistics, which includes frequencies and percentages. The qualitative data was analyzed in the content analysis and the analyzed data is presented using tables and figures in form of a report.

3.7 Limitations and delimitations of the study

Time was limited for data collection. Here to overcome this, the researcher drew a work plan for the study in order to balance it with other activities such as internship.

Low responsiveness of some respondents due to fear of giving information. Here, the researcher explained to the respondents that the study was purely for academic purposes and confidential.

The study was faced with the problem of not finding all respondents in the study area. The researcher however arranged with respondents to fix for the researcher an appropriate time in order to collect reliability and valid information from them for the study.

Also the researcher faced a challenge of some respondents who were not literate. This was overcome by translating to them the meaning of the questions in the language that they understand.

CHAPTER FOUR

PRESENTATION, ANALYSIS, INTERPRETATION AND DISCUSSIONS OF STUDY FINDINGS

4.0 Introduction

This chapter presents findings on the effect of inflation on the performance of large scale industries, a case study of Bidco (U) Ltd. The presentation was organized in chapters following the research objectives.

4.1 Bio-Data Information of Respondents

To complete the study, the study needed to explore the demographic information of respondents that included; gender, age and education level of respondents. The results are presented below;

4.1.1. Gender of Respondent

Figure 4.1.1: Gender of Respondent

Source: Primary data (2017)

The figure above shows that, 30(60%) were male and 20(40%) were female. This showed that men participated more than women reason being they were willing to provide information than women.

4.1.2. Age of Respondents

Table 4.1.2: Age of Respondents

Source: Primary data (2017)

The table above indicates the age range of employees interviewed and consulted with questionnaire. 18(36%) of the respondents were in the age bracket of 36-40years, 13(26%) of the study respondents were in that of 31-36years, 11(22%) of them were 40years and above and 8(16%) of the respondents were in the age bracket of 25-30years.

4.1.3. Education level of respondents

Table 4.1.3: Showing education level

Source: Primary data (2017)

Study results indicated that 35(70%) of the respondents had bachelor degrees and were the majority, 14(28%) of the respondents admitted diploma level, and only 2% of the respondents had postgraduate and none of the respondents interviewed had master degree.

4.2 Forms and causes of inflation

The first objective of the study was to determine the forms and causes of inflation. Respondents were required to show their level of agreement and obtained results are presented below;

4.2.1. Forms of inflation

Respondents were asked to indicate the forms of inflation. Obtained results are presented below;

Table 4.2.1: Forms of inflation

Source: Primary data (2017)

The table above indicates that 40(80%) of the respondents strongly agreeing and the 10(20%) agreeing with open inflation as a form of inflation that affect the performance of large scale industries. Study findings are in line with Denish (2015) who argued that open inflation happens when government does not attempt to restrict inflation. In a free market economy, where prices are allowed to take its own course, open inflation occurs.

Study findings in the table above shows that, 24(48%) of the respondents strongly agreed with suppressed inflation as a form of inflation, 9(18%) of them agreed. The remaining 17(34%), (2) 4% of the respondents disagreed, were not sure respectively while no respondent strongly disagreed. This finding is in agreement with (Basnet, 2015) who stated that suppressed inflation occurs when government prevents price rise through price controls, rationing, etc. Suppressed Inflation leads to corruption, black marketing, artificial scarcity among others.

Findings in table above indicated that creeping inflation is also a form of inflation with 13 (26%) of respondents agreeing and (5)10% of them strongly agreeing although at a lower rate since (20)40% of the respondents were not sure, (7)14% of them disagreed though non strongly disagreed. This agrees with Basnet (2015) stated that creeping inflation occurs when prices are gently rising. It is the mildest form of inflation and also known as a Mild Inflation or Low Inflation and it also occurs when prices rise by not more than (up to) 3% per annum (year).

From the table above, (25)50% of the study respondents strongly agreed with chronic inflation, (16)32% of them were not sure, none of the respondents strongly disagreed while (5)10% of the respondents strongly disagreed, 8% of them agreed. This finding is in line with Denish (2015) who argued that chronic inflation happens when creeping inflation persist (continues to increase) for a longer period of time. Chronic Creeping Inflation can be either Continuous (which remains consistent without any downward movement) or Intermittent (which occurs at regular intervals). It is called chronic because if an inflation rate continues to grow for a longer period without any downturn, then it possibly leads to Hyperinflation.

Study findings revealed that the walking inflation is another form of inflation with the ranking of (30)60% of responses strongly agreeing, (10)20% 0f them agreed, (5)10% of the respondents however was not sure. The remaining (3)6% of the respondents strongly agreed and only (2)4% of the study respondents disagreed. The findings are in agreement with Basnet (2015) who stipulated that walking inflation occurs when the rate of rising prices is more than the creeping inflation. When prices rise by more than 3% but less than 10% per annum (i.e. between 3% and 10% per annum). Walking inflation must be taken seriously as it gives a cautionary signal for the occurrence of running inflation. Furthermore, if walking inflation is not checked in due time it can eventually result in Galloping inflation.

Table above shows another form of inflation that affects the operations of large scale industries. (24)48% of the study respondents strongly agreed with moderate inflation, (15)30% of them agreed, while (8)16% of the respondents were not sure, only (3)6% of the respondents disagreed and no respondent strongly disagreed. Study findings agree with Basnet (2015) who lamented that moderate inflation happens when prices rise by less than 10% per annum (single digit inflation rate) and it is a stable inflation and not a serious economic problem.

Table above also shows that (16)32% of the study respondents strongly agreed with running inflation, (15)30% of them were not sure, while (8)16% of the respondents agreed, only (9)18% of the respondents disagreed and no respondent strongly disagreed. The findings concur with Denish (2015) whose study found out that running inflation happens when a rapid acceleration in the rate of rising prices is referred. Though economists have not suggested a fixed range for measuring running inflation, we may consider price rise between 10% to 20% per annum (double digit inflation rate) as a running inflation.

The table above shows (30)60% of the study respondents strongly agreed with galloping inflation, (10)20% of the respondents disagreed. The remaining (5)10% of the respondents each agreed and strongly disagreed while no respondent was not sure. This agrees with Basnet (2015) who argued that if prices rise by double or triple digit inflation rates like 30% or 400% or 999% per annum, then the situation can be termed as Galloping Inflation. When prices rise by more than 20% but less than 1000% per annum (i.e. between 20% to 1000% per annum), galloping inflation occurs. It is also referred as Jumping inflation.

The table indicates that majority of the study respondents 31(62%) agreed while the remaining 19(38%) strongly agreed. However, no respondent disagreed, was not sure or strongly disagreed. This agrees with Denish (2015) who stated that hyperinflation refers to a situation where the prices rise at an alarming high rate. The prices rise so fast that it becomes very difficult to measure its magnitude. However, in quantitative terms, when prices rise above 1000% per annum (quadruple or four digit inflation rate). During a worst case scenario of hyperinflation, value of national currency (money) of an affected country reduces almost to zero.

4.2.2 Causes of inflation

Respondents were asked to indicate the causes of inflation and different responses were obtained as presented below;

Table 4.2.2: Causes of inflation

Source: Primary data (2017)

The table above that (25)50% of the respondents strongly agreed with when excess money is printed, (15)30% of them agreed, (10)20% of the respondents strongly disagreed and none of the respondents was not sure or disagreed. This agrees with Abel (2005) stated that inflation can happen when governments print an excess of money to deal with a crisis. As a result, prices end up rising at an extremely high speed to keep up with the currency surplus. This is called the demand-pull, in which prices are forced upwards because of a high demand.

Study findings as indicated in table above reveal that 21(42%) of the respondents agreed with rising imported raw materials costs as a major cause of inflation, (12)24% of them strongly agreed compared to (5)10% of the respondents who disagree and another (5)10% of them that strongly disagree, though (7)14% of the respondents were not sure. This finding is in agreement with Plosser (2008) who argued that rising imported raw materials costs perhaps caused by inflation in countries that are heavily dependent on exports of these commodities or alternatively by a fall in the value of the national currency of country in the foreign exchange markets which increases the country price of imported inputs. A good example of cost push inflation was the decision by British Gas and other energy suppliers to raise substantially the prices for gas and electricity that it charges to domestic and industrial consumers at various points during 2005 and 2006.

Results show that majority of the respondents 25(50%) strongly agree with Rising labour costs as another major cause of inflation, (15)30% of them disagree, (10)20% of the respondents agree. This agrees with Stiglitz (2004) who argued that rising labour costs caused by wage increases which exceed any improvement in productivity. This cause is important in those industries which are ‘labour-intensive’. Firms may decide not to pass these higher costs onto their customers (they may be able to achieve some cost savings in other areas of the business) but in the long run, wage inflation tends to move closely with price inflation because there are limits to the extent to which any business can absorb higher wage expenses.

Also, most of the respondents 28(56%) agree while (22)44% of them strongly agree with higher indirect taxes. None of the respondents were not sure, disagreed or strongly disagreed. This is in line with Denis (2015) who argued that higher indirect taxes imposed by the government can cause inflation for example a rise in the rate of excise duty on alcohol and cigarettes, an increase in fuel duties or perhaps a rise in the standard rate of Value Added Tax or an extension to the range of products to which VAT is applied. These taxes are levied on producers (suppliers) who, depending on the price elasticity of demand and supply for their products, can opt to pass on the burden of the tax onto consumers. For example, if the government was to choose to levy a new tax on aviation fuel, then this would contribute to a rise in cost-push inflation.

Table shows that (27)54% of the study respondents strongly agree with depreciation of the exchange rate while (23)46% of the respondents agree. None of the respondents were not sure, disagreed or strongly disagreed. This agrees with Denish (2015) who stated that the depreciation of the exchange rate has the effect of increasing the price of imports and reduces the foreign price of a country exports. If consumers buy fewer imports, while foreigners buy more exports. If the economy is already at full employment, prices are pulled upwards.

The table above shows that, (35)70% of the respondents strongly agree with faster economic growth while (15)30% of them strongly disagree. None of the respondents were not sure, disagreed or strongly disagreed. This agrees with Chand (2008) who argued that the rising consumer confidence and an increase in the rate of growth of house prices both of which would lead to an increase in total household demand for goods and services. The faster economic growth in other countries, providing a boost to exports overseas. Higher prices following an increase in demand lead to higher output and profits for those businesses where demand is growing (Daniels, 2009).

Findings in table above indicated that International lending and national debts is also a cause of inflation with 13(26%) of respondents agreeing and (5)10% of them strongly agreeing although at a lower rate since (20)40% of the respondents were not sure, (7)14% of them disagreed though non strongly disagreed. This agrees with Daniels (2009) who argued that inflation can also be caused by international lending and national debts. As nations borrow money, they have to deal with interests, which in the end cause prices to rise as a way of keeping up with their debts. A deep drop of the exchange rate can also result in inflation, as governments will have to deal with differences in the import/export level.

Study findings in the table above show that, (24)48% of the respondents strongly agreed with federal taxes put on customer products as a cause of inflation, (9)18% of them agreed. The remaining 17(34%), (2)4% of the respondents disagreed, were not sure respectively while no respondent strongly disagreed. This study finding concurs with Stiglitz (2004) whose study found out that inflation can be caused by federal taxes put on consumer products such as cigarettes or fuel. As the taxes rise, suppliers often pass on the burden to the consumer; the catch, however, is that once prices have increased, they rarely go back, even if the taxes are later reduced. Wars are often cause for inflation, as governments must both recoup the money spent and repay the funds borrowed from the central bank. War often affects everything from international trading to labor costs to product demand, so in the end it always produces a rise in prices.

4.3 Effect of inflation on profitability of large scale industries

The second objective of the second was to examine the effect of inflation on profitability of large scale industries. Respondents were also required to indicate their level of agreement and results were obtained and are presented below;

Table 4.3.1: Effect of inflation on profitability of large scale industries

Source: Primary data (2017)

The table above that (25)50% of the respondents strongly agreed with Increasing input prices reduces profits for large scale industries, (15)30% of them agreed, (10)20% of the respondents strongly disagreed and none of the respondents was not sure or disagreed. The finding of this study agrees with that of Beck et al. (2013) who agreed that inflation causes the prices of inputs to increase; this causes a reduction in the price of the end product thus minimizing profits for various products.

The table above indicates that (40)80% of the respondents strongly agreeing and the (10)20% agreeing with wage increases increase the tax base. Study findings are in line with Nicholas (2011) who notes that any increase in the wages of workers further widen the tax base of people leading to a reduction in the purchasing power of people thus, a reduction in the number of customers for an organization leads to a reduction in overall sales of the organization.

The table above shows that, (35)70% of the respondents strongly agree with inflation reduces the purchasing power of money thus reduces sales while (15)30% of them strongly disagree. None of the respondents were not sure, disagreed or strongly disagreed. This finding is in line with Nicholas (2011) who argued that inflation reduces the purchasing power of money, inflation and the expectation that it will continue causes lenders to demand higher interest rates on loans. This is because lenders want to be compensated, not only for sacrificing the use of their money and assuming a risk in lending, but also for the expected decline in the purchasing power of their money during the life of the loan. In addition, there is a tendency for borrowers, also expecting the value of the money to decline before they repay the loan, to be willing to pay higher rates to borrow money. The willingness to pay higher rates to borrow is reinforced if the borrower uses the money to buy something that is apt to increase in value with the inflation (such as a house). Therefore, inflation and inflationary expectations can press base rates upward.

The table indicates that majority of the study respondents 31(62%) agreed with inflation brings low rate of return on assets while the remaining 19(38%) strongly agreed. However, no respondent disagreed, was not sure or strongly disagreed. This is in agreement with Boyd and Champ (2004) whose undertaking study on how inflation, affects banking and economic growth notes that one way inflation may affect the banking sector is by reducing the amount of credit that is available to business, inflation reduces the real rate of return on assets.

Study findings revealed (30)60% of responses strongly agreeing with lower rates of return discourage savings, (10)20% 0f them agreed, (5)10% of the respondents however was not sure. The remaining (3)6% of the respondents strongly agreed and only (2)4% of the study respondents disagreed. This agrees with Boyd and Champ (2004) who stated that lower rates of return discourage savings but tend to encourage borrowings. The new borrowers entering the market are likely to be of lesser quality and more likely to default on their loans. Banks are then forced to react to these effects of lower real returns on their loans and an influx of less credit worthy borrowers by rationing credit that is restrict the quantity of loans made, simply by setting a higher lending rate. They further note that inflation only affects rationing when it rises above some critical level.

4.4 Other factors that affect the profitability of large scale industries

The third objective of the study sought to establish the other factors that affect the profitability of large scale industries. Various responses were obtained and are presented below;

Table 4.4.1: Other factors that affect the profitability of large scale industries

Source: Primary data (2017)

The table above indicates that (40)80% of the study respondents of the respondents strongly agreeing and the (10)20% agreeing with the degree of competition a firm faces is another factor that affects the profitability of large scale industries. Study findings are in line with Levich (2001) who stated that if a firm has monopoly power then it has little competition. Therefore demand will be more inelastic. This enables the firm to increase profits by increasing the price. For example, very profitable firms, such as Google and Microsoft have developed a degree of monopoly power, with limited competition. If the market is very competitive, then profit will be lower. This is because consumers would only buy from the cheapest firms. Also important is the idea of contestability. Market contestability is how easy it is for new firms to enter the market. If entry is easy then firms will always face the threat of competition; even if it is just “hit and run competition” – this will reduce profits (Jonan, 2009).

The table above shows that, (38)76% of the respondents strongly agree with the strength of demand while 12(24%) disagreed. None of the respondents agreed, were not sure or disagreed. This line with Hellene (2007) who stated that demand will be high if the product is fashionable, e.g. mobile phone companies were profitable during the period of rising demand and growth in the market. Products which have falling demand like Spam (tinned meat) will lead to low profit for the company. Some companies, like Apple, have successfully carved out strong brand loyalty making customers demand many of the new Apple products.

The table above shows that, 42(84%) of the respondents strongly agree with the state of the economy while (8)16% disagreed. None of the respondents strongly disagreed, were not sure or disagreed. This agrees with Castle (2006) who stipulated that if there is economic growth then there will be increased demand for most products especially luxury products with a high-income elasticity of demand. For example, manufacturers of luxury sports cars will benefit from economic growth but will suffer in times of recession.

The table above shows that, (37)74% of the respondents strongly agree with advertising, 13(26%) agree. None of the respondents strongly disagreed, were not sure or disagreed. This agrees with Bill (2008) who stated that a successful advertising campaign can increase demand and make the product more inelastic demand. However, the increased revenue will need to cover the costs of the advertising.

The table above shows that, (45)90% of the respondents strongly agree with management, 5(10%). None of the respondents strongly disagreed, were not sure or disagreed. This agrees with Levich (2001) who stipulated that successful management is important for the long-term growth and profitability of firms.

CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS

5.0 Introduction

This chapter presents a summary of the study findings, conclusion(s) drawn, recommendations, and areas for further research basing on study findings.

5.1 Summary of study findings

The study found out that the major forms of inflation include; open inflation  as agreed upon by 50(100%), suppressed inflation with 33(66%), creeping inflation agreed upon by 23(46%), chronic inflation (29) 58%, while 40(80%) of the respondents cited walking inflation, 39(78%) cited moderate inflation, 26(52%) mentioned running inflation, 35(70%) of the respondents revealed galloping inflation and 50(100%) cit4ed hyperinflation. The main causes of inflation according to study findings included excess money in circulation since 40(80%) of the respondents agreed, rising imported raw materials costs as agreed by 33(66%), rising labour costs as 35(70%) of the respondents agreed, 50(100%) of the respondents revealed higher indirect taxes, also 50(100%) cited depreciation of the exchange rate, 35(70%) of the study respondents said faster economic growth while 23(46%) revealed international lending and national debts and 33(66%) of the respondents cited federal taxes put on customer products.

The study also found out that inflation affects profitability in many ways such as 35(70%) of the respondents agreed with increasing input prices reduces profits for large scale industries, also 50(100%) revealed wage increases increase the tax base, 35(70%) revealed inflation reduces the purchasing power of money thus reduces sales, 50(100%) said inflation also brings low rate of return on assets and 40(80%) of the respondents mentioned that lower rates of return discourage savings.

The study found out that the other factors that affect the profitability of large scale industries included the degree of competition a firm faces as 40(80%) of the respondents agreed, 38(76%) of the respondents cited the strength of demand, 50(100%) of the respondents mentioned the state of the economy, also 50(100%) cited advertising and 50(100%) of the study respondents revealed management.

5.2 Conclusion

Inflation affects the profitability of most industries in countries where it hits. The main forms of inflation that affect the profitability of large scale industries include; open inflation, suppressed inflation, creeping inflation, chronic inflation, walking inflation, moderate inflation, running inflation, galloping inflation and hyperinflation. Inflation is caused by mainly excess money, rising imported raw materials costs, rising labour costs, higher indirect taxes, depreciation of the exchange rate, faster economic growth, international lending and national debts and federal taxes put on customer products.

Inflation affects the profitability of large scale industries in many ways such as Increasing input prices reduces profits for large scale industries, also wage increases increase the tax base, inflation reduces the purchasing power of money thus reduces sales, it also brings low rate of return on assets and lower rates of return discourage savings. While the other factors that affect the profitability of large scale industries include the degree of competition a firm faces, the strength of demand, the state of the economy, advertising and management.

5.3 Recommendations

The study recommends that the government should put up strict laws and regulations to minimize inflation in the country so that organizations can increase on their performance.

The study also recommends that organisations should increase interest rates through the federal reserve so that inflation is reduced.

The study recommends that the government should directly or indirectly reduce the money supply by enacting policies that encourage reduction of the money supply.

The study also recommends that the government should focus on setting policies to increase competitiveness and efficiency of the economy putting downward pressure on long-term costs.

Also, the government should increase taxes (such as income tax and VAT) and cut spending. This improves the budget situation and helps to reduce demand in the economy.

Government should put efforts to limit wage growth since lower wage growth helps to reduce cost push inflation and demand pull inflation.

5.4 Areas for further research

The study recommends that more studies should be carried out on the effect of management system on organization’s profitability, the role played by the government in reducing inflation and the effect of inflation on household income.

REFERENCES

Abel, Andrew; Bernanke, Ben (2005). Macroeconomics (5th ed.). Pearson

Basnet, G. (2015). The Role of Exports, Inflation and Investment on Economic Growth. Int J Eco

Beck, A., Voineagu V., Ţiţan E., Şerban R., Ghiţă S., Todose D., Boboc C., Pele D., (2013). Theory and econometric practice, Meteor Press Publishing, Bucharest

Boyd, J. & Champ, B. (2004). Inflation and Financial Market Performance: What Have We Learned in the Last Ten Years? University of Minnesota .Carlson School of Management and Federal Reserve Bank of Cleveland.

Chand, H. (2008). Macroeconomics: a European text. Oxford [Oxfordshire]: Oxford University Press.ISBN 0-19-877468-0

Chowdhury, K. Emon. (2012). Impact of Inflation on Bank Lending Rates in Bangladesh. Journal of Politics & Governance Vol. 1, No. 1, pp. 5-13.

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APPENDICES

APPENDIX I: STUDY QUESTIONNAIRE FOR RESPONDENTS

Dear respondent,

I am KALEMBE RHODA, a student of Kyambogo University pursuing a Bachelor’s Degree in Arts in Economics. This study is intended to determine ‘effect of inflation on the performance of large scale industries: A Case Study Of Bidco (U) Ltd”. Your feedback is very important as your inputs will be used for academic purposes only. I greatly appreciate if you could take a few minutes to provide me with information. Your response was kept confidential and it will not be divulged to any person or institution outside this corporation.

SECTION A: BIOGRAPHIC DATA

(N.B Answer by Ticking where applicable)

1. Gender

Female                                                                        Male

2. Age in years

25-30                                                                           31-36

36-40                                                                           Above 40

3. Education Level

Diploma                                                                      Bachelor

Postgraduate                                                               Masters

Section B: Forms and Causes of Inflation

4. According to you, what are the various forms of inflation that affect large scale industries?

Tick the best option by using strongly Agree (SA), agree (A), Not Sure (NS), Disagree (D) and strongly disagree (SD).

Others specify ……………………………………………….

5. In your opinion, what causes inflation? Tick the best option by using strongly Agree (SA), agree (A), Not Sure (NS), Disagree (D) and strongly disagree (SD).

Others specify…………………………………………………………………….

Section C: effect of inflation on profitability of large scale industries

6. What are the effects of inflation on profitability of large scale industries? Tick the best option by using strongly Agree (SA), agree (A), Not Sure (NS), Disagree (D) and strongly disagree (SD).

Others specify…………………………………………………………………….

Section D: Other factors that affect the profitability of large scale industries

6. Indicate the other factors that affect the profitability of large scale industries?

Tick the best option by using strongly Agree (SA), agree (A), Not Sure (NS), Disagree (D) and strongly disagree (SD).

Others specify…………………………………………………………………….

Thank you for your time