Buddhist Investment Criteria By Manoje

Manoje  Prutthisathaporn   4904640481  

Establishing  Buddhist  Investment  Criteria    :  The  analysis  through  Product  Differentiation  Theory  and  the  Case  Study  of  Thailand  SET   50  Index   1.  Introduction   1.1  Background     In  Milton  Friedman's  classic  article,  The  Social  Responsibility  of  Business  is  to  Increase  its  Profits,  he   wrote  in  1970  in  his  stockholder  theory  of  corporate  moral  responsibility  that  a  corporation's  only   moral  responsibility  was  to  promote  the  financial  well-­‐being  of  its  stockholders  (McAleer,  2003).  It  is   evident  that  business  world,  particularly  the  United  States,  is  currently  moving  toward  his  theory   since  a  vastly  variety  of  corporations  has  increasingly  adopted  his  principle.  Numerous  companies   are  creating  an  energy-­‐efficient  product,  racing  to  be  greener  than  one  another,  attempting  to  be   perceived  as  a  good,  reliable  firm,  and  improving  environmental  and  working  conditions.  For   instance,  most  players  in  automobile  industry  have  substantially  expanded  the  production  of  hybrid   car,  massive  farming  firms  have  adopted  an  organic  farming,  and  consumer  goods’  manufacturers   considerably  have  labelled  their  products  noting  on  energy  usage.  This  strengthens  the  belief  that   profits  and  principles  are  not  mutually  exclusive  and  investment  industry  is  no  exception.   Ethical  investment  was  born  out  of  a  dream  to  be  an  alternative  investment  for  people  who  desire  to   invest  in  what  they  believe.  They  pay  attention  not  only  to  the  number  of  risk  and  return,  but  also  to   where  their  money  goes.  Ethical  investment  is  defined  as  putting  your  money  where  your  morals   are,  or  investing  according  to  your  beliefs  (Fehrenbacher,  2001).     To  respond  to  a  variety  of  belief  around  the  world,  various  types  of  ethical  investments  have  been   initiated,  which  in  fact  fall  into  the  three  classifications  –  religious  investment,  green  investment,  and   socially  responsible  investment.  Firstly,  funds  with  religious  investment  consist  of  Catholic  fund,   Islamic  fund,  and  Jewish  fund.  The  main  focus  of  catholic  fund  is  on  life  ethic,  which  rules  out   investments  in  companies  participating  in  abortion.  Companies  whose  products  or  services  violate   the  Catholic  Church’s  teachings  on  a  consistent  life  ethic,  including  contraceptives,  embryonic  stem   cell  research,  and  abortion-­‐related  products  and  services  are  also  excluded.  The  most  famous   catholic  fund  is  Christian  Brothers  Investment  Services,  Inc.  (CBIS)  which  is  the  leader  in  Catholic   socially  responsible  investing.  CBIS  possess  approximately  $3  billion  in  assets  under  management  for   over  1,000  Catholic  institutions  worldwide,  including  dioceses,  religious  institutes,  educational   institutions  and  health  care  organizations.  Next,  Islamic  funds  exclude  engagement  in  what  Islamic   laws  prohibit,  including  alcohol-­‐related  activities,  conventional  banking  services,  entertainment  and   gambling,  life  insurance,  and  pork-­‐related  products.  Its  main  difference  from  other  ethical  funds  is   the  prohibition  on  interest-­‐based  transactions  and  finance.  As  a  consequence,  allowance  of  limited   debt  has  protected  Islamic  community  from  investment  losses  in  the  past,  particularly  during  crisis   period.  The  last  religious  fund  is  Jewish  fund.  Under  Jewish  teaching,  investors  should  feel   responsible  for  the  harm  done  to  others  by  the  companies  whose  stock  they  own.  The  prohibition   incorporates  no  profit  from  forbidden  activities,  especially  those  generating  pollution  or  exploiting   labor  force,  and  no  ownership  of  assets  that  cause  others  harm.  The  manager  of  Jewish  fund  is  likely   to  involve  the  process  of  positive  engagement  with  corporations  in  order  to  raise  their  general   ethical  standards.  

Manoje  Prutthisathaporn   4904640481   The  second  classification  of  ethical  investment  is  green  investment.    The  major  characteristic  of   green  investment  is  a  pursuit  in  an  environmentally-­‐oriented  investment  policy.  Funds  with  green   investment  usually  use  company’s  impact  on  the  environment  or  its  effort  to  minimize  this  as  their   principal  criteria.  Data  from  Fintactica,  a  US  independent  research  and  analysis,  disclosed  that  green   funds  available  in  the  US  in  2004  held  a  lot  of  mainstream  businesses  with  a  good  record  in   environmental  activities  in  their  portfolio,  including  Microsoft,  AIF,  Coca  Cola,  and  Wells  Fargo.     Lastly,  socially  responsible  investment  (SRI)  is  investment  which  allows  investors  to  take  into  account   wider  concerns,  such  as  social  justice,  economic  development,  peace  or  a  healthy  environment,  as   well  as  conventional  financial  considerations,  according  to  The  Association  for  Sustainable  &   Responsible  Investment  in  Asia.  It  holds  negative  screening  to  exclude  firms  violating  its  principle   and  actively  seeks  out  firms  which  make  a  positive  contribution  to  society.  Most  SRI  funds  are   constructed  by  using  environmental,  social  and  governance  (ESG)  factors  as  selection  criteria,   including  clean  and  renewable  energy,  environmental  friendly  management,  workplace  practices   and  labor  standards,  ethical  policies,  and  corporate  governance  and  transparency.     SRI  is  an  increasingly  popular  field  of  investment,  particularly  in  Europe  and  North  America.  Celent   Financial  Consultancy  reported  in  2007  that  the  market  of  SRI  grew  from  1  trillion  euro  in  2005  to  1.6   trillion  euro  in  2007  distributed  across  451  SRI  funds  in  Europe.  The  trend  is  predicted  to  be   continuous  upward  in  Europe  and  the  situation  is  similar  in  the  United  States.  In  2007,  SRI  funds   accounted  for  11  percent  of  $25.1  trillion  in  total  assets  under  management  in  US  mutual  fund   industry  according  to  Report  on  Socially  Responsible  Investing  Trends  published  by  Social  Investment   Forum.  The  report  also  revealed  the  growth  rate  of  18  percent  in  total  assets  under  management   using  socially  responsible  investing  strategies,  increasing  from  $2.29  trillion  in  2005  to  $2.71  trillion.     Ethical  investments  also  vary  in  the  levels  of  commitment  but  some  ethical  funds  might  combine   different  methods.  The  simplest  way  is  screening  -­‐  the  inclusion  or  exclusion  of  stocks  and  shares   based  on  ethical  ground  –  which  can  be  either  negative  or  positive.  With  negative  screening,   companies  are  excluded  from  the  investment  because  of  their  involvement  in  certain  activities   which  are  judged  such  negativity  as  heavy  polluters,  arms  companies,  and  animal  testers.  In   contrast,  positive  screening  helps  select  companies  with  superior  social  or  environmental   performance.   The  second  level  is  engagement.  According  to  Ethical  investment  research  services,  with   engagement,  fund  managers  actively  encourage  companies  to  adopt  social  and  environmental  best   practices.  This  can  involve  meetings  with  senior  management  and  voting  at  relevant  annual  general   meetings.  Many  of  the  larger  ethical  pension  funds  tend  to  concentrate  solely  on  engagement.   The  last  level  is  called  community  investing,  as  known  as  social  venture  capital.  It  is  the  investment   of  money  into  community  developments  that  contribute  to  the  growth  and  well  being  of  particular   communities  (Carla,  2007).  For  instance,  the  Grameen  Bank  of  Bangladesh  by  Nov  2000  had  already   lent  $3.2  billion  to  over  two  million  people.  Among  them,  90  percent  were  women  who  were   classified  as  very  poor  with  a  repayment  rate  of  98  percent.   Table1  SRI  -­‐  related  funds  in  Asia  in  May  2008    

 

Private  Equity     SRI  Pension  

Faith-­‐based    

Total    

Manoje  Prutthisathaporn   4904640481   Country     China     Hong  Kong     Japan     Korea     Taiwan     Singapore     Malaysia     Indonesia     India     Thailand    

Public  Funds     Mandates     2     0     0     0     2     19     0     0     1     20     59     1     0     0     60     37     2     6     0     45     3     0     0     0     3     3     1     0     10     14     2     0     0     81     83     0     1     0     1     2     1     1     0     1     3     2     0     0     1     3     Source  :    Association  for  Sustainable  &  Responsible  Investment  in  Asia  (ASrIA)    

Situation  of  ethical  investment  funds  in  Asia  is  summarized  in  the  table1.    The  leaders  of  SRI-­‐related   funds  in  Asia  are  Malaysia,  Japan,  and  Korea,  all  of  which  are  developed  countries,  while  developing   countries  like  China,  Thailand,  India,  and  Indonesia  have  a  few  numbers  of  ethical  funds.   The  three  Thai  ethical  funds  shown  in  the  table1  comprise  MFC  Environmentally  and  Socially   Responsible  Investment  Fund,  MFC  Invest  Global  Agribusiness  Fund,  and  MFC  Islamic  Fund.  In  other   words,  two  SRI  funds  and  one  religious  fund  have  been  launched  in  Thailand.  The  first  SRI  fund  in   Thailand,  MFC  Environmentally  and  Socially  Responsible  Investment  Fund,  aims  to  generate   sustainable  returns  as  well  as  to  support  companies  that  gave  a  priority  to  social  investment.  Firms   are  screened  on  their  policies  to  protect  the  environment  and  promote  social  awareness  and  a  third   party  standard  based  on  ISO  14000  compliance  as  well  as  the  corporate  governance  standards  set  by   the  Stock  Exchange  of  Thailand  are  applied.  Secondly,  MFC  Invest  Global  Agribusiness  Fund  is  the   first  fund  focusing  on  Agricultural  Business  in  Thailand.  The  fund  invests  only  in  investment  units  of   DWS  Invest  Global  Agribusiness  Fund  investing  in  global  agricultural  business  managed  by  Deutsche   Asset  Management.  Lastly,  the  investment  of  MFC  Islamic  Fund  is  determined  Religions  Advisory   Board,  as  known  as  Shariah  Committee,  consisted  of  distinguished  members  of  the  Thai  Muslim   community  who  are  knowledgeable  about  Islamic  law  and  principles.  The  fund  not  only  excludes   companies  that  do  not  engage  in  prohibited  businesses,  but  also  establishes  financial  criteria  for   investee  companies,  specifying  the  maximum  allowance  of  the  ratio  of  total  debt,  of  the  sum  of   interest  securities,  and  of  account  receivable.   Table2  Total  value  of  mutual  fund  industry  in  Thailand,  from  2002  to  2008   Item/Year   Asset  Management  Company     Total  Assets   Total  Asset  Value   (Billion  Baht)  

2008   21   1,105   1,533  

2007   21   910   1,610  

2006   18   808   1,222  

2005   18   683   962  

2004   17   526   681  

2003   14   429   720  

2002   14   346   435  

Source:  Association  of  Investment  Management  Companies  (AIMC)     The  table2  demonstrates  the  whole  picture  of  mutual  fund  industry.  The  total  asset  value  managed   by  mutual  funds  in  Thailand  increased  by  more  than  three  times  from  2002  to  2008.  This  data   illustrate  the  attractiveness  of  mutual  funds  to  Thai  people,  resulting  in  their  continuous  upward   rising  trend.  

Manoje  Prutthisathaporn   4904640481   1.2  Problems   A  large  number  of  diverse  ethical  investment  funds  with  their  standard  have  been  initiated  and   gained  a  huge  attention  from  public.  Nevertheless,  A  very  few  funds  with  Buddhist  investment  have   been  founded  as  Buddhist  investment  criteria  have  never  been  constructed  even  though  Buddhism   is  the  world's  fourth  largest  religion  in  terms  of  number  of  adherents.  One  of  them  is  Nirvana   Investment.  Its  website  describes  itself  as  Buddhist  private  investment  company  based  on   transparent  ethical  principles  which  seeks  solid  return  for  its  investors  with  the  ultimate  goal  of   supporting  Buddhist  organizations.  Its  criteria  of  investments  and  equity  selections  have  not  been,   however,  fully  developed  to  be  so  professional  that  other  investors  can  adopt.   Of  Thai  population,  97  percent  is  Buddhist.  Corporate  social  responsibility  and  Sufficiency  Economy   is  widely  recognized  by  numerous  public  and  private  organizations  as  a  balanced  alternative   development  approach.  In  addition,  Buddhist  Economics  has  increasingly  gained  attention  from   scholars  as  Buddhist  principles  are  scientifically  studied  and  acknowledged  that  they  do  not  to   contradict  to  economics  theory.     In  short,  the  uprising  awareness  of  sustainability  and  environmental  and  societal  concern  is  obvious   in  Thai  society,  implying  the  lack  of  alternative  in  investment  industry  responding  to  their  religious   beliefs.   1.3  Theory   The  analysis  and  development  of  this  paper  mainly  rely  on  two  economic  theories;  Buddhist   economics  and  Product  differentiation  theories.  Buddhist  economics  was  first  introduced  in  Chapter   4  of  E.F.  Schumacher’s  book  “Small  is  Beautiful”  in  1973.  Thereafter,  the  concept  has  been   elaborated  by  many  well  known  scholars  all  over  the  world.  Schumacher  (1989)  believed  that  “Study   of  Buddhist  economics  could  be  recommended  even  to  those  who  believe  that  economic  growth  is   more  important  than  any  spiritual  or  religious  value.”  The  aim  of  Buddhist  economics  is  to  correct   unrealistic  assumptions  of  mainstream  economics.  For  instance,  work  is  always  disutility,  human   nature  is  to  only  compete,  money  is  proxy,  and  maximum  consumption  is  an  end  of  everything.  In   conclusion,  the  study  of  Buddhist  economics  provides  a  better  understanding  of  economics  with   human  nature  to  explain  human  behavior  as  a  social  science.   Buddhist  economics  is  defined  as  the  subject  explaining  economic  activities  with  the  aim  for  both   individuals  and  society  to  achieve  peace  and  tranquility  under  resource  constraint  (Puntasen,  2004).   It  is  derived  from  the  lesson  of  the  Buddha’s  discoveries  on  his  path  to  enlightment  (Prayukvong,   2006).     The  concept  of  Right  Livelihood  was  employed  as  Schumacher’s  main  theme  to  develop  his   counterarguments  against  mainstream  economics  and  to  articulate  Middle  Way  between  modern   growth  and  traditional  stagnation.  Right  livelihood  means  avoiding  any  means  of  livelihood  that   involves  harm  or  exploitation  of  others  (Bogoda,  1994).  The  Buddha  mentioned  five  specific  kinds  of   livelihood  which  brought  harm  to  others  and  were  therefore  to  be  avoided  (Bodhi,  1994).  They  are   dealing  in  weapons,  in  sale  of  flesh  or  being  connected  with  the  raising  and  killing  of  animals  and  in   meat  production  and  butchery,  in  trading  in  living  beings,  including  slavery  and  prostitution,  in   poisons  or  drugs,  and  in  producing  or  selling  liquor.    

Manoje  Prutthisathaporn   4904640481   The  main  idea  of  Buddhist  economics  is  simplicity  and  non-­‐violence.  Every  economics  activity  must   not  harm  oneself  or  others.  The  underlying  reason  is  the  interconnected  aspects  of  human  existence   -­‐  human,  society,  and  nature  -­‐  which  are  correlated,  coordinated,  and  complemented  with  each   other  within  the  ecosystem.  To  follow  this  principle,  production  must  generate  no  negative  product   or  action.  Through  production  even  though  new  things  are  created,  it  is  merely  changes  of  state.   Production  is,  therefore,  justified  when  the  value  of  the  things  produced  outweighs  the  value  of   those  destroyed.  To  minimize  an  adverse  impact  on  environment,  non-­‐renewable  goods,  if  used,   must  be  used  only  when  they  are  indispensable  and  with  greatest  case  and  meticulous  concern  for   conservation  (Schumacher,  1989).    Also,  waste  should  be  kept  at  its  minimum  level  and  utmost   attempt  to  improve  nature  and  environment  should  be  prioritized.  Furthermore,  mind  plays  a  crucial   role  in  production  process  since  it  is  considered  as  a  powerful  factor  of  production.  The  supreme   factor  of  production  is  the  ability  to  understand  everything  by  and  in  its  own  nature,  used  to  control   all  factor  inputs  (Prayukvong,  2006).  Employment  justified  in  Buddhist  economics  is  to  give  a  man  a   chance  to  utilize  and  develop  his  faculties,  to  enable  him  to  overcome  his  ego-­‐centeredness  by   joining  with  other  people  in  a  common  task,  and  to  bring  forth  the  goods  and  service  needed  for  a   becoming  existence  (Schumacher,  1989).  Work  and  leisure  are  complementary  parts;  both  of  them   can  lead  to  joy.  To  sum  up,  production  process  should  be  done  in  such  a  way  enhancing  good  quality   of  human  input.   Buddhist  economics  considers  the  ethical  value  of  wealth  by  the  ways  it  is  obtained  and  the  way  it  is   used.  The  activity  on  which  consumers  spend  their  wealth  is  consumption.  In  Buddhist  economics,   consumption  is  to  maintain  good  physical  and  mental  health  and  to  generate  and  accumulate  of   wisdom.  It  is  only  a  mean  to  an  end,  not  an  end  in  itself,  and  must  be  balanced  to  an  appropriate   amount  to  attain  well  –  being,  resulting  in  forming  a  basis  for  the  further  development  of  human   potentialities.  Maximizing  satisfaction  through  consumption,  many  people  damage  their  own  health   and  harm  others.  If  satisfaction  is  sought  in  things  that  do  not  enrich  the  quality  of  life,  the  result   often  becomes  the  destruction  of  true  welfare,  leading  to  delusion,  intoxication,  and  loss  of  health   and  well-­‐being  (Payutto,  1994).  In  short,  only  moderate  consumption  with  the  right  amount  is   essential  to  realize  the  true  well-­‐being.     In  realistic  world,  where  none  of  the  market  is  perfectly  competitive,  products  can  be  differentiated   in  different  ways.  Most  consumers,  in  fact,  differ  in  their  taste.  With  horizontally  differentiation,   firms  have  to  decide  how  best  to  serve  different  types  of  consumer  and  offer  products  with  different   characteristics  but  similar  qualities  that  appeal  to  each  group.   In  a  location  (spatial)  model,  firms  view  some  products  as  closer  substitute  than  others.  They   compete  with  them  more  vigorously  than  those  that  consumers  perceive  as  less  close  substitutes.   The  model  is  based  on  two  main  assumptions.  First,  each  firm’s  product  has  a  particular  location  in   geographic  or  characteristic  space.  The  closer  two  products  are,  the  better  substitute  they  are.   Second,  consumers  have  locations  in  geographic  or  product  space  (Carlton,  2004).  They  prefer   products  that  are  close  to  their  preferred  types.     In  a  monopoly  market,  a  monopolist  decides  how  best  to  supply  consumers  and  consumers  are   distributed  uniformly  along  a  street  z.  To  purchase  a  product,  consumers  pay  the  price,  denoted  by  p   and  incur  transportation  cost  t  per  unit  of  length.  They  buy  exactly  one  unit  provided  that  a  price   plus  transport  costs  is  less  than  their  reservation  value,  denoted  by  V.  The  best  location  for  a  firm  to  

Manoje  Prutthisathaporn   4904640481   minimize  consumers’  transportation  cost  is  the  middle.  Given  the  price  and  middle  location,   consumers  at  the  ends  of  the  market  incur  highest  cost.  In  the  exhibit1,  all  consumers  within   distance  x1  to  the  left  and  right  of  the  shop  buy  the  product.   Exhibit1  Location  model  with  a  monopolist  

   If  the  monopolist  wants  to  target  all  consumers  along  the  street,  the  highest  price,  denoted  by  p*,   they  can  charge  is  p  such  that  p*  +  t/2  must  be  no  greater  than  V.  Thus,  p*  =  V  –  t/2   Two  stores  with  the  same  marginal  cost  selling  the  same  physical  good  are  located  at  the  extremes   of  the  city.  Consumers  living  at  x  incurs  a  cost  of  tx  to  go  to  store1  and  a  cost  of  t(1-­‐x)  to  go  to   store2.  They  derive  their  consumer  surplus  from  the  gross  of  price  and  transportation  costs.  A   consumer  who  is  indifferent  between  the  two  firms  is  located  at  x  where     p1+tx=  p2+t(1-­‐x)     Therefore,  given  p1  and  p2,  demanded  for  firm1  and  firm2  is     D1(p1,p2)=x  =  (p2-­‐p1+t)/2t  and  D2(p1,p2)=1-­‐x  =  (p1-­‐p2+t)/2t     Firm  i’s  profit  is  πi  =  (pi-­‐c)(pj-­‐pi+t)/2t.     To  maximize  profit,  the  first-­‐order  condition  for  firm  i  is  pj+c+t-­‐2pi=0  Hence,  the  competitive  price   under  product  differentiation  is  obtained:  pi=pj=c+t     When  t  increases,  both  stores  charge  higher  price.  Firms  only  compete  directly  with  others  near   them  since  consumers  incur  higher  cost  to  move  their  position.  In  other  words,  they  compete  less   for  the  same  consumer  as  the  consumer  values  proximity.  As  a  result,  they  gain  monopoly  power   allowing  them  to  increase  price.  In  conclusion,  the  higher  transportation  cost  is,  the  more   differentiated  products  are.    Additionally,  an  outside  good,  or  an  undifferentiated  product  competitively  supplied  by  another   industry,  can  be  added  to  the  location  model  to  study  the  industry  where  there  is  an  indirect   competitor.  Utility  from  outside  good  less  its  price  is  o.  Customer  may  decide  to  buy  the  outside   good  if  it  gives  more  net  utility.  A  customer’s  location,  L*,  represents  customer’s  most  preferred   type  of  goods  and  u  denotes  the  utility  the  consumer  obtain  from  spending  at  L*.  The  pleasure  a   consumer  gets  from  consuming  a  product  in  the  market  located  at  t  is  

Manoje  Prutthisathaporn   4904640481   U(L,L*)  =  u  –  t│L  -­‐  L*│   Each  consumer  attempts  to  maximize  consumer  surplus:  U(L,L*)  –  p.  Customers  only  buy  a   commodity  of  the  best-­‐buy  firms  in  the  field  if  its  surplus  exceeds  the  surplus  they  gain  from   consuming  the  outside  good.   max  [U(Li,L*)  –  pi]  ≥  o   The  greatest  surplus  the  customer  can  obtain  from  a  product  in  the  industry  occurs  when  he   purchases  at  the  location  of  t*,  causing  no  transportation  cost.  Maximum  surplus  he  can  acquire  is,   therefore,  u  –  p*  where  p*  is  the  price  of  a  product  located  at  t*.  He  is  willing  to  buy  a  product  in  the   industry  only  if  its  surplus  is  greater  than  that  from  outside  good:  u  –  p*≥  o.  Then  the  reservation   price  can  be  derived:  v  =  u  –  o.  It  represents  the  highest  price  the  consumer  is  willing  to  pay  for  a   product  in  the  industry.   The  location  model  has  a  much  richer  application  as  a  model  of  product  differentiation  where   location  can  be  thought  of  in  time  -­‐  departure  times  of  planes,  buses,  or  trains  –  or  in  product’s   design  or  variety.  When  location  represents  degree  of  preference,  transportation  cost  denotes  a   utility  loss  from  not  consuming  their  preferred  commodity.     1.3  Literature  review   A  lot  of  papers  have  studied  the  association  between  Buddhist  Economics  and  business.  Zsolanai   (2009)  proposed  in  his  book  that  Buddhist  economics  was  not  a  system  but  a  strategy,  which  could   be  applied  in  any  economic  setting  and  provided  a  rational,  ethical,  and  ecological  value  background,   which  promoted  happiness,  peace  and  permanence  (Zsolanai,  2009).  Wanna  Prayukvong  (2007)  did   an  in-­‐depth  research  on  Thai  entrepreneur  called  Asia  Precision.  The  owner  of  Asia  Precision  adopts   Buddhist  Economics  approach  and  encourages  the  employees  to  follow.  The  result  is  amazingly   successful.  With  the  implementation  of  institutional  environment,  peacefulness,  positive   satisfaction,  happiness,  and  trust  occur  in  Asia  Precision  while  its  financial  performance  is  superior.   Besides  the  case  study,  the  author  also  argued  that  corporate  social  responsibility  activities  did  not   shift  the  paradaigm  of  self-­‐interest  of  capitalism.  In  Japan,  buddhist  economics  has  been   recommended  by  a  former  President  of  the  Japanese  Miyazaki  Bank  since  1997  as  a  novel  approach   to  economic  management  that  is  an  appropriate  middle  path  between  capitalism  and  socialism.     Numerous  scholars  have  researched  a  fund  and  its  industry  with  the  approach  of  product   differentiation  framework.  Becchetti  and  Solerino  (2005)  produced  several  working  paper  series  in   2005  for  Center  for  European  Integration  Strategies  regarding  this  field.  The  model  of  horizontal   product  differentiation  where  a  zero  profit  socially  concerned  producer  and  a  profit  maximizing   producer  compete  over  price  and  socially  and  environmentally  responsible  feature  is  analyzed.  Their   study  concludes  that  ethical  producer’s  entry  has  positive  indirect  effects  on  aggregate  social  and   environmental  responsibility  since  the  incumbent  finds  it  optimal  to  imitate  when  consumers'   perception  of  ethical  cost  is  sufficiently  high  (Becchetti,2005).  Hortacsu  and  Syverson  (2004)  applied   product  differentiation  theory  to  analyze  the  case  of  S&P  500  Index  Funds  with  a  focus  on  dissimilar   search  cost.  Shuging  li  (2005)  purported  a  research  on  product  differentiation  and  fee  competition  in   the  mutual  fund  industry.  According  to  these  two  literatures,  despite  a  large  number  of  players   offering  nearly  homogenous  return  pattern  of  funds  and  severe  competition,  mutual  funds  can  

Manoje  Prutthisathaporn   4904640481   charge  unequal  fee  by  differentiating  from  each  other,  resulting  in  positive  profit,  as  a  result  of   imperfect  measures  of  quality  and  reasonable  magnitudes  of  search  costs.  Barracchini  (2007)   proposed  a  model  of  portfolio  selection  with  additional  index  besides  risk  and  return  indexes  where   an  investor  was  rational,  ethical,  and  adverse  to  the  risk.  The  selection  process  based  on  ethical   principles  of  an  investor  is  demonstrated.   In  conclusion,  numerous  studies  prove  the  practicality  and  accomplishment  of  applying  Buddhist   Economics  to  business  world.  Investment  fund  industry  is  differentiated  in  many  characteristics   despite  its  severe  competition,  resulting  in  unequal  fee  each  fund  charge.  One  method  to   differentiate  a  fund  is  with  ethical  or  social  responsible  feature,  responding  to  some  customers'   preference.     Nevertheless,  the  link  between  Buddhist  economics  and  investment  criteria  has  never  been   developed.  As  a  result,  no  application  of  Buddhism  principle  to  ethical  feature  of  investment  fund   has  been  initiated.  This  is  the  gap  this  paper  attempts  to  contribute.     1.4  Statement  of  the  problem     The  questions  this  paper  aims  to  discuss  are  how  the  applicable  criteria  of  investment  fund  based  on   Buddhist  economics  is  designed  and  how  the  characteristics  of  Buddhism  investment  differ  from   those  of  mainstream  investment.  Through  the  analysis  and  the  development  in  this  paper,  an   investor  or  a  fund  manager  who  want  to  select  a  firm  to  invest  according  to  Buddhist  economics   would  be  beneficial.  The  author  believes  that  Buddhism  investment  yields  in  total  more  utility  to   some  customers  than  mutual  fund  even  though  its  return  is  lower,  and  the  return  of  Buddhism   investment  is  greater  than  that  of  government  bond.  Buddhism  investment  is,  consequently,   supposed  to  be  practical  and  satisfy  some  consumers’  preference.     1.5  Objective  and  Methodology   This  paper  aims  to  establish  practical  Buddhism  investment  criteria  and  then  to  illustrate  the  utility   people  gain  from  Buddhism  investment  fund  and  from  mainstream  mutual  fund.  At  first,  the  paper   will  seek  out  the  principles  of  Buddhist  economics  that  can  be  tracked  to  construct  investment   criteria.  Then  the  benefits  of  Buddhism  investment  will  be  explored.  In  the  next  section,  Buddhism   and  mainstream  investment  would  be  modeled  by  Product  differentiation  theories.  The  conditions   that  Buddhism  investment  has  to  satisfy  will  be  constructed.  Eventually,  a  case  study  of  SET50  will  be   researched  to  analyze  the  possibility  of  Buddhism  investment  and  evaluated  the  hypothesis.  The   author  will  rely  on  the  criteria  established  to  screen  the  firms  in  SET50  and  compare  the  return  with   SET50  index.   Within  the  above  described  framework,  this  paper  is  divided  into  eight  sections  (including   introduction  and  conclusions).  The  second  section  analyzes  Buddhist  economics  theories  to  seek  out   the  principles  that  can  be  applied  to  design  a  benchmark  identifying  firms  that  fail  to  meet  and  the   ones  that  satisfy.  The  benchmark  help  exclude  a  firm  that  violate  Buddhist  principle  and  select  a  firm   with  a  superior  performance.  The  third  section  explores  externality  framework  to  illustrate  the   negative  effect  of  mainstream  investment  on  society  and  the  benefit  of  Buddhism  investment.  In  the   fourth  section,  the  model  of  Buddhist  horizontally  product  differentiation  in  investment  market   where  a  mainstream  investment  firm  and  a  firm  with  Buddhist  investment  offer  different  

Manoje  Prutthisathaporn   4904640481   characteristics  of  funds  to  attract  consumers  is  considered  with  a  derivation  of  demand  for  Buddhist   investment  fund  and  for  mainstream  fund.  The  fifth  section  applies  the  model  a  case  study  of   Thailand  SET50.  Firms  in  Thailand  SET50  index  will  be  evaluated  and  the  established  criteria  will  be   simplified  to  screen  out  negative  firms  with  limited  available  information.  Then  the  five  -­‐  years   monthly  return  of  selected  firms  will  be  collected  to  find  their  average  return  and  standard   deviation.  Also,  the  weighted  average  of  the  selected  firms’  returns  according  to  their  market  value   will  be  computed  and  then  compared  with  SET50  index.  The  5  years  return  of  the  government  bond   will  be,  eventually,  considered  to  justify  the  return  of  Buddhist  investment.     2.  The  establishment  of  Buddhist  investment  criteria   Buddhist  economics  discussed  in  the  first  section  can  be  summarized  into  six  main  points  as   following.  There  are  five  prohibited  activities  Buddha  mentioned,  an  economics  activity  must  not   bring  harm  to  others,  society,  or  environment,  the  main  goal  of  consumption  is  to  enrich  the  well  –   being,  business  prioritization  is  to  improve  nature  and  environment,  the  value  of  creation  in  the   production  process  must  outweigh  the  value  of  what  is  destroyed,  and  a  job  must  give  workers  a   chance  to  increase  their  potential  and  satisfaction.  The  investment  criteria  designed  in  this  section   correspond  to  these  six  issues  and  are  outlined  according  to  the  level  of  ease  and  complexity.  The   excluded  criteria  that  screen  out  a  negative  firm  will  be  constructed  first  whereas  the  selection   process  that  screen  in  a  superior  firm  will  be  discussed  later  in  this  section.  The  first  two  criteria  are   negative  screening  and  a  firm’s  profound  information  is  not  required.  To  be  more  comprehensive,   the  third  criterion  which  is  a  negative  screening  requires  investigation  of  a  firm.  The  last  three   criteria  which  attempt  to  distinguish  a  firm  following  Buddhist  Economics  are,  eventually,  to  be   identified  with  an  in-­‐depth  study  on  individual  firm.   Firstly,  the  obvious  activities  violating  Buddha  teaching  are    those  dealing  in  weapons,  in  sale  of  flesh   or  being  connected  with  the  raising  and  killing  of  animals  and  in  meat  production  and  butchery,  in   trading  in  living  beings,  including  slavery  and  prostitution,  in  poisons  or  drugs,  and  in  producing  or   selling  liquor.  Companies  or  industries  engaging  in  these  five  harmful  activities  are  definitely   excluded.     Secondly,  firms  whose  production  process  or  product  brings  harm  to  consumers,  other  people,   society,  or  environment,  must  be  excluded.  Under  economics  framework,  they  generate  negative   externality.  Three  questions  have  to  be  identified;  whether  a  firm  is  in  an  industry  that  generates   pollution,  whether  a  firm’s  product  upholds  violence,  and  whether  a  firm  sells  a  product  that   damages  consumers’  physical  or  mental  health  or  environment.       Thirdly,  the  issue  of  relation  with  customers  is  crucial.  First,  a  firm  must  not  exploit  consumers  and   deal  with  them  fairly.  Second,  its  product  must  be  safe  and  not  deceptive.  The  number  of  consumers   appealing  or  filing  the  company  in  the  problem  of  quality  of  goods  or  service  contact  should  be  taken   into  account.   Fourthly,  the  inclusion  of  a  firm  depends  on  conservation  of  energy  and  natural  resources  and   environment  improvement.  An  attempt  to  improve  nature  and  environment  should  be  obviously   prioritized.  Minimization  of  non  –  renewable  goods  is  significant  in  Buddhist  economics.  If  they  are   used,  it  must  be  in  case  of  the  fact  that  they  are  indispensable  and  with  greatest  method  of   conservation.  A  firm  corresponding  to  the  following  two  concerns  is  unconditionally  in  favor;  a  firm  

Manoje  Prutthisathaporn   4904640481   whose  core  business  enriches  the  environment  and  a  firm  without  the  non  –  renewable  input  or   with  an  excellent  record  of  a  substantially  declining  usage  of  non  –  renewable  goods.     Fifthly,  a  firm  creating  a  high  value  –  added  product  is  strongly  preferred.  Since  the  creation  of  final   goods  comprises  the  destruction  of  various  inputs,  a  firm  whose  production  procedure  relies  on  the   least  amount  of  resources  destroyed  to  maximize  the  value  of  a  final  product  shall  get  supported.   The  proportion  of  the  value  of  total  inputs  in  the  value  of  an  output  is  advantageous.     The  last  element  to  is  working  condition.  Firms  must  not  exploit  their  labor.  Instead,  firms  must   ensure  that  the  nature  of  a  job  they  assign  to  their  employee  both  enhance  their  potential  and  well-­‐ being  and  afford  them  a  sense  of  satisfaction.  These  are  two  employment  criteria  a  firm  has  to   satisfy.  The  turnover  rate  is  an  indication  of  how  a  firm  treats  its  employee,  how  the  nature  of  a  job   that  employees  are  assigned  is,  and  how  employees  feel  while  working  with  a  firm.     These  six  criteria  are  summarized  in  the  exhibit2  to  describe  step-­‐by-­‐step  to  establish  Buddhist   investment  criteria.   Exhibit2  The  establishment  of  Buddhism  investment  criteria  

  3.  The  analysis  of  externality  of  Buddhist  investment   An  externality  occurs  when  a  person’s  well-­‐being  or  a  firm’s  production  capacity  is  directly  affected   by  the  action  of  other  consumer  or  firms  rather  than  indirectly  through  changes  in  prices  (Perloff,   2004).  If  someone’s  consumption  or  production  activities  hurt  or  help  other  outside  a  market,  it   causes  externalities.  A  market  with  negative  externalities  is  illustrated  in  the  left  diagram  of  the   exhibit3  whereas  the  right  diagram  of  the  exhibit3  demonstrates  a  market  with  positive   externalities.  

Manoje  Prutthisathaporn   4904640481   Exhibit3  Market  with  externalities  

 

 

In  both  markets,  a  competitive  firm  produces  at  competitive  output,  qc,  by  equating  marginal  cost,   MC,  with  firm’s  demand,  D,  derived  from  marginal  benefit,  MB,  consumers  gain.  This  competitive   optimum  does  not,  nonetheless,  maximize  social  welfare  since  an  indirect  benefit  or  cost  to  a  third   party  is  not  taken  into  account.  To  generate  social  optimal  output,  qs,  equilibrium  must  be  where   marginal  social  benefit,  MSB,  equals  marginal  social  cost,  MSC.  MSC  is  the  cost  of  manufacturing  one   more  unit  of  goods  plus  the  additional  externality  damaging  others  while  MSB  sums  the  direct   benefit  to  consumers  buying  a  product  with  the  positive  externality  benefiting  others.  Negative   externality  is  denoted  by  marginal  external  cost,  or  MEC,  whereas  marginal  external  benefit,  or  MEB,   represents  positive  externality.  On  the  left  side  of  the  diagram,  competitive  market  produces   excessive  negative  externalities  because  the  firms’  private  cost  is  less  than  their  social  cost.  Last  unit   of  output  yields  more  additional  cost  than  additional  benefit.  Conversely,  a  firm  in  the  right  market   of  the  exhibit3  considers  only  demand  for  its  product  without  realizing  someone  outside  the  market   benefiting  from  its  production.  To  enhance  social  welfare,  the  firm  should  expand  its  output.  To  sum   up,  because  of  externalities,  the  competitive  market  equilibrium  does  not  maximize  welfare.   With  Buddhist  investment  criteria,  the  amount  of  investment  is  not  allowed  to  flow  to  a  firm  with  a   creation  of  negative  externality.  Instead,  a  firm  with  positive  externalities  receives  a  financial   support  to  boost  its  production.  Only  a  firm  creating  indirect  benefit  to  a  society  is  provided  with   more  of  capital,  resulting  in  an  upward  shift  in  marginal  curve.  This  leads  to  an  increase  in   production  and  output.  Conversely,  a  firm  with  negative  externalities  encounters  a  more  difficulty  in   acquiring  a  fund.  Its  marginal  cost  shifts  to  the  left,  causing  a  drop  in  output.  As  a  consequence,  a   social  welfare  increases  and  a  market  equilibrium  moves  closer  to  a  socially  optimal  point  as  shown   in  the  exhibit4.  The  new  competitive  optimum  is  closer  to  the  social  optimum  than  the  original  one.   Exhibit4  The  impact  of  Buddhist  investment  on  externality  market  

Manoje  Prutthisathaporn   4904640481  

 

 

In  short,  Buddhism  investment  alleviates  the  externality  problem  leading  to  market  failure,  making   society  better  off  and  indirectly  enriching  the  happiness  of  consumers  following.   4.  Buddhist  Product  Differentiation  Model   Most  of  the  assumptions  in  the  model  are  standard  assumptions  in  the  product  differentiation   literature.  The  model  features  are  outlined  by  defining  producers,  market  space  and  consumers.  In   the  production  side,  there  are  two  investment  firms  in  the  market;  a  mainstream  firm  offering  a   return  –  maximizing  investment  fund  and  an  ethical  firm  providing  a  Buddhist  investment  fund.   These  two  firms  have  the  same  marginal  and  fixed  cost  and  charge  a  customer  nothing,  meaning  no   fee  is  collected.  A  return  each  fund  performs  represents  a  price  a  normal  firm  charge.  Given  all  other   characteristics  being  equal,  a  customer  purchases  the  one  with  higher  return.  The  higher  return  a   fund  makes,  the  lower  the  price  consumers  perceive.   The  establishment  of  the  ethical  firm  with  its  Buddhist  investment  fund  into  the  market  generates  a   new  market  space  along  a  Buddhism  segment  with  unit  length  for  simplicity  and  without  lack  of   generality.  Location  on  the  left  extreme  corresponds  to  the  choice  of  selecting  a  firm  in  which  only   risk  and  return  are  taken  into  account  while  the  extreme  right  side  of  the  market  represents  the   choice  of  a  screening  process  which  strictly  follows  Buddhist  economics.  Within  these  two  extreme   choices,  both  firms  dispose  of  a  set  of  strategies  in  buddhism  –  a  where  a  ∈  [0,1]  allowing  them  to   locate  in  any  point  of  the  segment  if  they  want.  The  set  of  strategies  in  Buddhism,  ranging  from  zero   to  one,  corresponds  to  different  level  of  engaging  Buddhist  economics  into  selection  process.   In  the  demand  side,  consumers  have  inelastic,  unit  demands,  and  heterogenous  preference  on   Buddhism  and  they  are  uniformly  distributed  across  the  line  segment  [0,1].  Each  consumer’s  position   in  the  interval  represents  individual  perception  of  the  Buddhist  value  of  a  fund.  Consumers  who   choose  a  fund  exactly  corresponding  to  their  preference  incur  no  cost.  Also,  consumers  who  buy  a   fund  offering  higher  level  of  Buddhist  in  selection  than  their  preference  experience  zero  cost  since   what  they  consume  is  above  their  satisfied  standard.  Thus,  the  cost  of  moving  along  the  line   segment  is  positive  only  for  those  going  from  a  more  Buddhism  to  a  less  Buddhism  point  as  they  go   to  the  location  which  is  below  their  satisfaction  level.  This  explains  why  costs  are  increasing  only  in   the  distance  between  consumer  and  the  location  of  return  –  maximizing  investment  fund  for   consumers  buying  from  the  mainstream  investment  firm.  

Manoje  Prutthisathaporn   4904640481   Consumer  utilities  are  increasing  in  fund’s  return  level  and  decreasing  in  the  distance  between   consumer’s  Buddhism  stance  and  the  Buddhism  value  incorporated  in  the  purchased  fund.  The   welfare  of  a  consumer  located  at  x  is    rI  –  Vp  -­‐  t(x-­‐a)  for  x-­‐a  ≥  0  or  rI  –  Vp  for  x-­‐a<0   where  V  p  is  the  consumer  reservation  value,  or  a  minimum  return  he  is  willing  to  obtain  in  case  of   zero  costs  of  Buddhist  distance,  rI  is  the  return  performed  by  the  i-­‐th  fund,  and  t  represents  the  cost   of  utility  loss  per  unit  of  distance  from  his  Buddhist  stance.  In  this  model,  consumers  care  only  for   downward  deviations  from  their  preferred  point.  In  case  of  uniform  return,  a  fund  located  in  a=0   would  be  weakly  preferred  to  one  located  at  the  right  by  all  consumers.  Each  consumer  attempts  to   maximize  consumer  surplus:     max  {rI  –  t(x-­‐a)  for  x-­‐a  ≥  0,  rI  for  x-­‐a<0}     Funds,  as  a  consequence,  tend  to  move  rightward  to  attract  more  consumers  since  it  reduces   consumers’  utility  loss  from  consuming  the  product  with  less  satisfaction  of  Buddhist  feature  if  the   location  is  mobile.     To  elaborate  the  model  in  a  visual  way,  the  market  with  only  one  fund  is  demonstrated  first  and   then  the  complete  version  of  the  model  with  the  two  firms  mentioned  above  is  explored  later.  In  the   exhibit5,  there  is  only  one  fund  located  at  a=0.5,  offering  a  return  of  r.  V  is  the  consumer  reservation   value  and  t  represents  utility  loss  per  unit  of  distance  from  his  Buddhist  stance.     Exhibit5  Buddhist  horizontally  product  differentiation  model  with  only  one  goods  in  the  market  

  The  line  originating  from  the  point  r  has  a  function  of  r  –  tx.  Its  slope  is  determined  by  the  cost  of   utility  loss  per  unit  of  length.  The  line  between  the  fund  and  the  extreme  left  is  horizontal,   expressing  the  level  of  utility  consumers  receive  without  utility  loss  while  the  line  for  the  other  half   of  the  market  is  downward  –  sloping  because  of  the  fact  that  the  farther  a  location  away  from  the   fund’s  stance  is,  the  greater  utility  loss  occurs.  Higher  utility  loss  per  unit  of  length  would  lead  to  a   less  number  of  buyers,  implying  considerable  level  of  differentiation.    Consumers  would  consume   the  fund  as  long  as  their  utility  from  consuming  less  the  utility  loss,  if  occurs,  exceeds  their   reservation  value.  The  consumers  in  the  market  are  divided  into  three  cases.  First,  consumers   located  between  extreme  left  and  the  middle  have  lower  level  of  Buddhist  than  the  stance  of  the   fund  and,  therefore,  incur  on  utility  loss  and  consume  the  fund.  Conversely,  the  other  half  of  the  

Manoje  Prutthisathaporn   4904640481   market  purchasing  the  fund  would  encounter  utility  loss  since  their  Buddhist  preference  exceeds  the   level  the  fund  performs.  Despite  some  utility  loss,  the  ones  located  between  the  middle  and  x1  still   buy  the  funds.  Lastly,  those  rejecting  the  fund  are  located  to  the  right  of  x1  since  their  net  utility   from  selecting  the  fund  is  below  their  reservation  value.  Accordingly,  demand  for  the  fund  is  equal   to  x1   With  an  inflexible  location,  a  return  -­‐  maximizing  investment  fund  presented  by  a  mainstream  firm  is   fixed  at  a=0  whereas  a=1  is  the  location  of  a  Buddhist  investment  fund  of  an  ethical  firm  providing.  A   consumer  who  is  indifferent  between  these  two  funds  is  located  at  x2  where   r  r–  Vp  -­‐  t(x2-­‐0)  =  rb  –  Vp  which  can  be  rearranged  to  be  rr  –  t  x2  =  rb   where  rr  is  the  return  of  return  -­‐  maximizing  investment  fund  and  rb  is  the  return  of  the  Buddhism   investment  fund.  A  consumer  will  prefer  the  return  -­‐  maximizing  investment  fund  to  the  Buddhism   investment  fund  if  rr  –  tx  >  rb  ,  and  vice  versa.  With  rearrangement,  demand  for  the  return  -­‐   maximizing  investment  fund  and  demand  for  the  Buddhism  investment  fund  are     Dr(rb,  rr)  =  x2  =  (rr  –  rb)/t  and  Db(rb,  rr)  =  1  –  x2  =  1  -­‐  (rr  –  rb)/t     As  t  rises,  demand  for  the  return  -­‐  maximizing  investment  fund  declines.  In  other  words,  with  an   increase  in  cost  of  Buddhist  distance  perceived  by  customers,  more  consumers  select  Buddhism   investment  fund  since  the  opportunity  cost  goes  up.  This  situation  explained  is  visualized  in  the   exhibit6.   Exhibit6  Buddhist  horizontally  product  differentiation  model  with  two  firms  selling  extremely   different  fund  

  Originating  from  rr  at  the  extreme  left  of  the  market,  the  downward-­‐sloping  blue  line  represents  the   level  of  utility  each  consumer  obtains  from  consuming  the  return  -­‐  maximizing  investment  fund.  The   farther  distance  away  from  the  fund  a  consumer  is,  the  lower  utility  he  acquires.  Conversely,  the   utility  consumers  gain  from  purchasing  a  fund  is  represented  by  the  horizontal  red  line.  No  matter   where  they  are  in  the  market,  the  acquisition  of  the  Buddhism  investment  fund  yields  no  utility  loss.   Comparing  the  utility  both  funds  give,  each  consumer  selects  the  one  with  higher  utility  as  long  as  it   is  above  his  reservation  value.  In  other  words,  at  each  location  a  consumer  prefer  a  higher  line  as   long  as  it  is  above  their  reservation  value.  Consequently,  consumers  within  the  distance  x2  to  the  left  

Manoje  Prutthisathaporn   4904640481   are  in  favour  of  the  return  -­‐  maximizing  investment  fund  while  the  best  choice  for  those  whose   stance  is  to  the  right  of  x2  is  the  Buddhism  investment  fund.   Then  the  concept  of  an  outside  good  is  added  to  the  model.  Government  bond  is  riskless  investment   helping  a  government  and  benefiting  a  country  and  usually  yield  relatively  low  return  as  a  result  of   government  guarantee.  It  is  also  perceived  as  an  alternative  way  to  invest  and  diversify  a  risk.  It  is,   therefore,  reasonable  to  consider  government  bond  as  an  outside  good  for  fund  industry.   Government  bond  yields  a  return  of  g  and  incurs  no  transaction  cost  to  purchase.  Hence,  utility   consumers  gain  from  choosing  the  government  bond  is  g.  Consumers  will  buy  their  best  satisfied   fund  in  the  field  rather  than  government  bond  if  maximum  utility  they  can  attain  from  a  fund  is   greater  than  the  utility  they  get  from  the  government  bond:   max  {rI  –  t(x-­‐a)  for  x-­‐a  ≥  0,  rI  for  x-­‐a<0}  ≥  g   With  the  existence  of  government  bond,  the  condition  that  consumers  will  consume  one  of  these   two  funds  rather  than  the  government  bond  is     max  {rr  –  tx,  rb}  ≥  g   In  conclusion,  the  first  necessary  condition  for  attractive  Buddhist  investment  fund  is  that  its  return   must  be  no  lower  than  the  return  of  government  bond  and  its  second  necessary  condition  is  that  its   return  must  be  greater  than  the  return  of  the  return  -­‐  maximizing  investment  fund  less  a  consumer’s   utility  loss  from  consuming  the  product  with  less  satisfaction  of  Buddhist  feature.  A  consumer  always   selects  Buddhist  investment  fund  if  its  return  is  larger  than  the  returns  of  government  bond  and  of   return  -­‐  maximizing  investment  fund.  

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