CAPITAL BUDGETING PRACTICES OF MAJOR BAHRAINI COMPANIES AND THEIR BRITISH COUNTERPARTS A COMPARATIVE APPROACH

Abstract

Abstract : The main objective of this thesis is to investigate and identify the capital budgeting practices of large successful Bahraini industrial companies in the public sector in order that over time, their good practices may be disseminated more widely to other companies in the country. The significance of this research stems from the fact that Bahrain is a small country with a limited amount of economic resources of which oil is the most important and is depletable; thus, the utilization of these resources, in an efficient manner becomes a pressing necessity. Another factor contributing to the value of this research and the prime motive for undertaking this commitment is the lack of empirical studies on the capital budgeting practices of Bahraini companies. This study attempts to compare the capital budgeting practices of Bahraini companies with those of a group of British companies carefully selected for this purpose. The objectives of this comparison are two-fold: firstly, from an academic perspective, to examine the theory of capital budgeting in the two completely different environments of a developed country (UK) and a developing country (Bahrain) thereby contributing to the body of literature and knowledge in this arca. This comparison should identify the similarities and dissimilarities in the practices of the two groups and the areas where improvements can be achieved. Secondly, from a practical viewpoint, the research provides some conclusions and recommendations which could help managers, as well as those responsible for making decisions, to improve their practices and procedures in accomplishing the goal of better utilisation of the economic resources at their disposal. Five Bahraini companies are included in this study representing major industries in the country. The Bahraini companies in this study are considered to be quasi public and produce a significant portion of the country's GNP. These companies were established with the mission of accelerating economic growth, diversifying the source of income, and providing job opportunities for the people of Bahrain. On the other hand, the British sample consisted of thirty-six companies identified as having the same characteristics as those of the Bahraini companies. A questionnaire was used to collect primary data as to the specific nature of the capital budgeting practices of the British companies. To gain more insight into the capital budgeting practices of Bahraini companies, structured interviews were arranged with Bahraini managers and other officials in these companies using the same questionnaire. The major findings of the study include: (1) Both the Bahraini and the British companies were found to follow a relatively structured approach to their capital investment decisions (systematically, well defined steps or activities); (2) The two groups of companies exhibit a great similarity in certain key areas of their capital budgeting system. These areas include: existence of a formal screening body, evaluation techniques, preparation of a long-term capital budget, existence of at least one capital budgeting staff and risk analysis; (3) However, dissimilarities were observed in other areas. These areas include: the systematic search for investment opportunities, post-audits of capital investment projects, application of management science techniques and expenditure control . These similarities and dissimilarities are reflected in the capital budgeting sophistication index for Bahraini companies and their British counterparts specifically developed for this study. The British companies appeared to be relatively more sophisticated than the Bahraini companies, as indicated by the sophistication score. Implications of the study for the theory of capital budgeting and for various individuals responsible for capital investment decisions, as well as recommendations of the study and direction for future research, have been highlighted.