CHAPTER TWO: LITERATURE REVIEW
The aim of this chapter is to review the literature on the impact of government on the port sector. The chapter will be divided into three sections namely, theoretical, conceptual and empirical. The conceptual review will present a discussion of concepts while the empirical review will analyse previous studies on this topic. The theoretical review will discuss theories that are relevant to the topic and which will be used to explain the relationship between variables. Also, gaps in literature will be identified.
2.2 Conceptual review
2.2.1 The nature of the port sector
Gibbs et al.(2014) define a port as a location on the coast that is made up of harbours where ships can dock, offload or load cargo and people to and from land. The selection of ports depends on the access to water and land for both demand and shelter from waves and wind. Ports with deeper water though rare are said to handle larger vessels (Mokhtariet al., 2011). The storage and support facilities of ports vary widely depending on the traffic. There are different types of ports such as cargo ports, in-land ports, and seaports among others.At times, ports fall out of use maybe due to changes in the coastline, changes inshippingmethods or coastal erosion (Kirubakaran, 2010). Also, several initiatives have been established to decrease negative environmental effects on port such as World Ports Climate Initative, SIMPYC, EcoPorts and African Green Port initiatives among others (Brooks, 2010). Ports often have equipment to handle cargo such as forklifts and cranes
2.2.2 Port modernization and the impact of the government
Port modernization as per Lee, Song and Ducruet (2008) refers to the development of ports using the most recent technology and infrastructure. As such, existing facilities are upgraded to handle traffic and containers. The changes in cargo handling that has been brought about by the new technology in shipping and the need to maximize the utilization of existing facilities has resulted in port modernization. Most marine transport in the world is challenged by inefficient port operations and inadequate provision of infrastructure. These delays have resulted in increased costs. Ng and Liu (2010) argue that this problem can only be solved through port modernization. Port modernization is advantageous in various ways. According to Padilha and Ng (2012), it enables reliable, safe and cost-effective port operation. Use of technology allows for interconnection of port activities such as cargo handling which in turn stimulates the performance of the overall port operation. Secondly, poor modernization enhances resiliency thus enabling facilities to survive extreme seismic events (Mandal, Roychowdhury and Biswas, 2016).
A majority of traditional ports with obsolete technology and infrastructure lack shape and the capacity to recover quickly from seismic events (Roso, Woxenius&Lumsden, 2009). It is, therefore, imperative to modernise them. Thirdly, modernised ports have improved operational efficiency and can accommodate modern shipping operations such as support larger vessels. Besides that, port modernization is essential to accommodate the changing market and economic needs. For example, shipment of petroleum products is increasing significantly than cargo growth thus necessitating port modernization (Wang and Ducruet, 2012). Therefore, new ships to shore cranes are advantageous as they allow for larger container vessels. However, Lai et al. (2011) argue that port modernization is an expensive initiative that requires adequate funding.
In a world where globalization and open economies are becoming the rule, the public sector ports still continue to operate in accordance with an outdated model characterised by inefficiencies and labour regimes. As such, a larger part of the port system is still lagging behind ion responding to the new demands of the world economy. Moreover, the sector tends to hinder full incorporation into the world economy due to its inadequate technology, slow operations and bureaucracy. For nations to be successful, it is essential for governments to intensify port modernization process which has already started in some nations. As earlier stated port modernization is a costly adventure that requires adequate funding. As such, it is imperative of governments to allocate finances to port labouring training (Rodrigue, 2010). These labourers should be equipped with IT knowledge and information on equipment operation that is required in port modernization. Ducruet, Lee and Ng, (2010) also contend that while doing so, the government should take care not to interfere politically as this will limit the ability of the port authority to operate efficiently.
Governments in different countries in the world have taken initiatives to modernize ports in their country (Verny and Grigentin, 2009). In Tanzania, the government has initiated second port modernization to provide a more reliable and cost effective transport link for the neighbouring landlocked countries and as such facilitate their overseas trade activities (Kirubakaran, 2010). Countries like Estonia and Iceland have also been ranked higher than the USA in port infrastructure and this has enabled them to gain a competitive advantage in an export-driven economy (Ducruet and Notteboom, 2012). In Ecuador, there are nine private port terminals, six oil terminals and four open port installations. The government took advantage of this and decided to modernize the public ports (Lam and Yap, 2011). In Philippines, the government plans to expand the capacity of Davao seaport due to the rapid growing volume of cargo (Nam and Song, 2011).
2.2.3 New port development and the impact of the government
New port development in overall is the development of new ports. Lam and Yap (2011) argue that real estate needs of importing companies have resulted in tremendous congestion in the port sector due to the amount of goods manufactured and exported. It is estimated that in the next five years, a majority of ports will triple their freight throughout and the containership capacity (Investindia.gov.in, 2017). To address this issue, the maritime industry is taking a shift to focus more on the development of new ports. Furthermore, the increased and continuous demand for bulk commodities of raw materials has created demand for shipping transport requiring for the development of new ports to sustain this demand. According to Sakhuja (2011), seaway transportation is mostly used to transport loads of heavy capacity because it is the cheapest and most effective. As such, governments in different countries have established policies to expand their port capacity by developing new ports. Government policies to develop new ports has benefited the port sector in various ways. Firstly, development of new inland ports that are in close proximity to the ‘traditional’ ports has enhanced efficient access to the transportation system and logistic services (Amit, 2017). This has also helped to reduce workload at major ports. Secondly, new ports have helped to extend the parking for containers and trailers as in the case of Europe (Chin and Low, 2010). Thirdly, development of new ports in countries such as China has resulted in increased capacity in that it increases the intermodal capacity for inland freight distribution (Wang et al., 2014). This additional capacity can be used for off-site storage. Palliset al. (2011) posit that governments such as that of Canada have sought new port development as a way of taking advantage of the new available infrastructure and improved technology. Examples of new port initiatives by the government include the Sagarmala project in India, the proposed New Port of Galway in New Zealand, among others.
2.2.4 FDI in port sector and the impact of the government
FDI plays a vital role in the economic development of man nations. The reason behind pioneering for inward FDI is to promote productivity gains through sharing of managerial skills, technology and enhancing access to markets (Lu, Shang and Lin, 2012). The port sector, just like any other sector has challenges of sustaining its growth in an efficient and cost effective manner. As stated earlier, development of ports requires both port modernization and port development and these two can only be achieved through inward FDI. According to Poelhekke and van der Ploeg (2010), allowing 100% FDI into the port sector helps to supplement technology and skills and domestic capital for an accelerated economic growth.
Othman, Bruce and Hamid (2011) outline various advantages of FDI to the port sector of the involved countries. FDI stimulates economic development by creating a more conducive environment for investors while at the same time benefiting the domestic nation. Also, it promotes international trade by breaking the bonds on import tariff and increasing the international presence of the involved country (Banerjee and Gupta, 2013). Furthermore, inward FDI helps to create more jobs for people in the port sector due to the development of new infrastructure and expansion of the sector. More importantly, FDI enhances the development of the human resources in the port sector as people get training on new port technology and procedures. The port sector also experiences high productivity because FDI results in improved infrastructure which greatly reduces the production cost. Although FDI in the port sector has many benefits, Arnold et al. (2012) argue that it hinders domestic investment and is at risk of political changes.
Weak operational performance in major seaports of different countries couples up with low levels of investments in port infrastructure have triggered governments in such countries to come up with policies to attract inward FDI (Meersman, Van De Voorde and Vanelslander, 2014). Governments can attract foreign investors in the port sector by permitting 100% FDI through automatic route and also through joint venture formations. This FDI has been used by the port sector in countries such as Europe to create an optimal port infrastructure, foster strategic alliance and expedite implementation of skills.
Governments can permit FDI to be used in both port connectivity and port infrastructure. Improvement of infrastructure involves activities such as the construction of additional assets, container terminals, construction of cargo handling facilities and warehouse facilities, ship repair facilities and construction of dry docks among others. For example in the UK and China port sector, FDI has supplemented technology and skills and domestic capital (Kent, and Fox, 2004). According to the World Bank, positive FDI policies on the port sector by governments promote economic growth in the manufacturing sector and leads to rapid growth in the port throughput (Meersman, Van De Voorde and Vanelslander, 2014). Besides infrastructure, permission of 100% FDI by the government in the port sector has led to port connectivity in most nations, there is a lot of traffic caused by trucks on both roads and railways. Port connectivity allow for the development of Dedicated Freight Corridors (DFC) which provide additional truck capacity thus easing traffic (Haralambides and Behrens, 2000).
In China, the government has allowed foreign investors in the port sector and recently launched a new door-to-door cargo service goods service between Europe and China with the aim of expanding the sector (Xu and Yip, 2012). In the UK, the government permitted the privation of the UK port sector and this led to the development of infrastructure e and expansion of the sector making it one of the best developed port sector in the world. In India, the government permitted a 100% FDI on the port sector (Lu, Shang and Lin, 2012).
2.3 Theoretical review
Theories are vital in research because they provide a well-substantial explanation of aspects of the natural world based on facts that have been confirmed through experiments and observations. This research will be guided by the modernization theory and the Solow-Swan model.
2.3.1 Modernization theory
The theory of modernization posits that modernization is a continuous transition from ‘traditional’ or ‘pre-modern’ to a modern society (Warner, 2010). It originated from the ideas of Max Weber (1864-1920) who was a German sociologist. The theory explores the internal characteristics of a country and assumes that with assistance, the ‘pre-modern’ nations can be developed just like the more developed countries. The theory attempts to determine the social variables which contribute to development and also explores social evolution. Warner (2010) contends that modernization theory stresses on both the change process and responses to that change. Besides that, the theory also assumes that the traditional societies will develop when they adopt more modern practices. Developments such as new technology and improved transport make modernization essential. However, critics of the theory argue that it encourages the adoption of western culture leading to a destruction of the domestic culture.
This theory can be applied to the impact of the government on port modernization in the Indian Port Sector. The Indian Port Sector can be said to be ‘pre-modern’ as per the theory. The sector still uses traditional systems and infrastructure which result in slow production, inefficiencies and traffic (Warner, 2010). In order for the Indian Port Sector to transit from its ‘pre-modern’ way to a modern way, it will have to modernize. According to the modernization theory, modernization of the Indian Port Sector will involve the adoption of the most recent or ‘modern’ technology. This will enable it to develop like the developed nations.
2.3.2 Solow-Swan Model
Developed by Trevor Swan and Robot Solow in 1965, the Solow-Swan model describes the long-run economic growth based on technological progress, population growth, productivity and capital accumulation (Guerrini, 2010). In this case, the capital accumulation in Solow’s model is substituted by FDI and the population presents the port traffic. According to the model, FDI is more valuable than the domestic capital due to the belief that FDI promotes technological development ultimately increasing production (Guerrini, 2012). The model posits that output can be affected by governments’ policies such as subsidies and tax but not the long run growth rate. The growth rate will be influenced by the technological progress such as the replacement of inefficient port equipment (Guerrini, 2010). Therefore, according to the model, inward FDI will boost technological progress in the Indian Port Sector resulting in an increase in the production levels. In the short-run, growth in the Indian Port Sector will be determined by the steady level created by capital investment. On the other hand, in the long run, growth in the sector will be achieved through technological progress. As such, it is imperative for the Indian government to encourage inward FDI in order to improve port technology and increase production.
2.4 Empirical review
Gujar et al. (2014) studied the effect of government policies on FDI in the India Port Sector. The aim of the paper was to identify how inward FDI affects the Indian Port Sector. The study used secondary data methodology by reviewing data on the Indian Port Sector, current government policies and the challenges faced by the foreign investors. The authors used the Solow-Swan model to explain the link between variables. The findings of the study show that India is an attractive destination for FDI and especially in the infrastructure area. Also, the researchers note that although the Indian Port sector has attracted a substantial amount of FDI in the past, it is still not adequate compared to other port sectors like Australia and China. The researchers conclude that total productivity of the port sector is greatly influenced by the presence of the government in the market which slows down the FDI inflows. However, the study is limited to secondary sources which are not always reliable.
Mukundan (2007) undertook a comparative study of the maritime operations in India. The aim of the study is to compare the maritime operations in India with those of China. The researcher used a secondary data methodology to discuss the strong economic maritime growth in China and the current scenario of the maritime sector in India. Secondary data was the best choice for the researchers because it was impossible to carry out a primary survey in both countries. The researcher used descriptive design to compare the maritime sector of the two countries. The findings of the study show that India lags behind in port growth as compared to China because most of the maritime sector such as shipping, ports and shipbuilding is still owned by the government. As such, this has resulted in inadequate funding from the government for growth, high bureaucracy levels leading to slow implementation and a lack of accountability. Furthermore, India has a poor maritime infrastructure. The findings of this study are reliable and generalizable to the whole country.
Another study is that by Ng and Gujar (2008) on the impact of government policies on India’s Dry Ports. The aim of the research was to investigate how the government of India has tried to solve dry port issues and how political influence can shape the competitive structure of an industry in developing countries. The study was guided by the Porter’s Competitive Diamond model. The methodology of the study included desk research, and an in-depth interview with 26 companies that had operated, invested and/or managed dry ports in India. The interviewees were carefully selected and involved persons with key strategic decisions. The study found out that the Indian dry port is characterized by inefficiency. The government has addressed this problem by introducing foreign investors through joint ventures and Build-Operate-Transfer (BOT) arrangements.
Ammar Jouili and AnisAllouche (2016) also studied how investment in the seaport affects the economic growth and infrastructure in the port sector. According to the paper, seaports are considered by governments to be vital factors in strengthening economies. The study was based in Tunisia and sought to evaluate how the government of Tunisia has allocated funds to develop infrastructure in the seaports. The methodology of the study involved a secondary data analysis on the infrastructure in Tunisia port sector. The findings of the study show that government investments in the seaport infrastructure has positively influenced the economy of Tunisia. This study is crucial in our current study as it contribute on the knowledge of the importance of government initiatives to improve port infrastructure.
Hiranandani (2012) focussed his study on “sustainable development in the maritime industry using a multi-case study of seaports.” The aim of the study was to analyse the sustainable port practices that governments have implemented in the port sector as well as identify challenges and opportunities faced by seaports. The researchers studied four ports by evaluating secondary data. These ports include Port of Rotterdam Authority in Netherlands, Transnet Ltd. Write a literature review or synthesis essay. In South Africa, Sydney Ports Corporation and the Port of Long Beach in the USA. The findings of the study showed that favourable government policies on public-private partnership, port sustainability and environmental-friendliness boosted the port sector. Also, all ports apart from South Africa’s Transnet were found to be in public-private partnerships. This study is relevant to the current study because it provides adequate knowledge on the impact of government policies on the port sector.
De and Ghosh (2003) undertook a study on the link between performance and traffic in the Indian ports. The study methodology employed econometric tests in order to determine the causal relationship between traffic and performance. Also, the port performance index (PPI) was used to measure the performance of the major ports in India. The findings of the study show that an improvement in asset and operational performance of a port results in higher traffic. As such, the Indian government has taken initiatives to address this issue by expanding the capacity of their ports. The study recommends that the Indian government should formulate policies by giving a priority to performance enhancing facilities so as to reduce traffic caused by high inefficiency. This study provides insights on the need for port expansion to reduce traffic and the role of government policies in port capacity. However, the findings of the study would have been more substantial if the external factors that influence performance and traffic such as technology, navigation channel and vessel size were considered.
Researchers such as Haralambides and Gujar (2011) evaluated the pricing policies and opportunities for public-private partnership in the Indian port sector. According to the study, the Indian port sector has a substantial overcapacity. This has led to the reduction of supply despite the increased demand. Both the Indian government and the private sectors view the Indian Port Sector as a pivot of export-led growth. However, the post sector is still majorly dominated by the public sector and conditions that make participation of the private sector to be risky. In order to solve this problem, the researchers recommend that the government should come up with strategies to attract foreign investment as well as maintain the domestic industry.
2.5 Gaps in literature
There still exist gaps in the literature on the impact of the Indian government on the Indian Port Sector. Gujar et al. (2014) only studies the impact of government policies of FDI on the Indian Port Sector and failed to discuss other government initiatives. Write a literature review on maritime science. Furthermore, the study was limited to secondary sources. Mukundan (2007), on the other hand, only compared the maritime operations of Chia with India and although he pointed out the problems facing Indian maritime and the need for government interventions, he did not focus much on government policies in the Indian sector. Ng and Gujar (2008) was close to the current topic but he majored on the dry ports and did not touch on other sections in the India Port sector. Ammar Jouili and AnisAllouche (2016) study’ contributes to the knowledge ion how government policies can attract investment in the port sector which can ultimately lead to improved infrastructure. However, the study was based in Tunisia. Hiranandani (2012) expounded on sustainable development and the practices that governments of Australia, South Africa, Netherlands and the USA have done towards sustainable development in their port sectors. Again, India was not included in the multi-case study. De and Ghosh (2003) only emphasized on the correlation between performance and traffic in the Indian port sector while Haralambides and Gujar (2011) reviewed policies on pricing and public-private partnership in the Indian port sector. Although all these studies contribute bits by bits in forming the current topic. None holistically addresses the current topic. The current research strives to fill this gap that exists in the literature on the impact of Indian government o the India Port sector.
2.6 Conceptual framework
The following framework was developed based on the variables of the study. The Indian Port Sector is the dependent variable because it cannot thrive without the independent variables. The independent variables are government policies of FDI, port modernization and new port development.
Figure 1: Conceptual framework
Independent variables Dependent variable
(Source: Researcher, 2017)
2.7 Chapter summary
The aim of this chapter was to critically review the literature on the impact of the government on the port sector. According to the literature port modernization and new port development are capital-intensive activities that require adequate funding from the governments. As such, governments in different nations such as Europe and China have established initiatives to address these issues. Additionally, different governments have allowed inward FDI in the port sector with the aim of improving infrastructure through new technology. The theory of modernization has been used to explain the importance of pot modernization while Solow-Swan economic model explains the benefits of inward FDI in the Indian port sector.