Management control systems and financial conditions: A study of municipal organizations in a developing country

Local government organisations face a dynamic environment characterised by demographic changes, local business cycle changes, and an increase in service demands where they find it increasingly difficult to achieve and maintain the level of financial condition necessary to achieve organizational objectives. These organisations in developing countries face more structural constraints, not least the institutional environment, which further affects their financial conditions for delivering services. Therefore, this thesis aims to – a) measure the financial condition of municipalities in Bangladesh; b) examine the influence of socio-economic, demographic, managerial and organizational factors on financial conditions, and probe into its determination process through the mediation of Management Control Systems (MCSs) of municipalities in Bangladesh; and c) investigate the role of budgetary practices in explaining the performances in terms of budgetary and service level solvencies of municipalities in Bangladesh. This thesis employs a mixed method approach to delve into the research questions to achieve the research objectives. While quantitative method is used to achieve the first two research objectives, the third objective necessitates employing a mixed method. Using time series data collected from archival documents of a representative sample of 72 municipalities in Bangladesh, municipal financial conditions are measured for the financial years from 2006-2007 to 2014-2015 by applying a composite index developed from eleven indicators organized under four dimensions. Subsequent to the measurement of financial condition, the influences of socioeconomic, demographic, managerial and organizational factors are also investigated quantitatively using cross-sectional data for the financial year 2014-15. Based on past studies relevant models are developed from which the theoretical relationships of socioeconomic, demographic, managerial and organizational factors with municipal financial conditions are hypothesized. These predicted relationships are then tested using quantitative data collected from primary source by conducting a survey and secondary sources such as archival documents and relevant databases of a representative sample of 93 municipalities in Bangladesh. Finally, the influences of budgetary practices are investigated by developing two sets of research queries in the form of hypotheses and questions involving both the practices and outcomes of municipal key budgets. These hypotheses and questions are then examined using a combination of quantitative data collected from both primary and secondary sources of a representative sample of 93 municipalities, and qualitative data collected from a set of interviews with a selection of municipal managers in Bangladesh. This approach is employed to shed more light by the qualitative data on the questions that remained unanswered by the quantitative data. Results obtained indicate differences across municipalities in Bangladesh in their overall as well as in various dimensions of financial conditions explaining their financial and operational strengths and weaknesses. Of the socio-economic and demographic factors, empirical evidences provide support for significant positive relationship of disaster susceptibility and revenue capacity with municipal financial conditions except for population density, which is insignificantly related. As predicted population size is found to be negatively related. Although managerial factors such as chief accountant’s competence, managerial involvement and autonomy except for mayoral competence are found to be significantly related (controlling for revenue diversification and municipal size); their indirect effects on municipal financial conditions through the mediation of strategic control systems are found to be insignificant. Similarly organizational factors, viz., stakeholders’ engagement, development oriented culture and municipal organizational autonomy except for the use of quality information are found to be significantly related to municipal financial conditions. These factors for overall municipalities do not have significant indirect effects on municipal financial conditions through the mediation of enabling budgetary control system, such effects (except for the use of quality information) however are found to be significant in cases where municipalities have higher revenue diversification and are larger in size. Empirical evidence from a quantitative line of enquiry support the significant (insignificant) moderating effect of central government influences on the relationship between municipal annual budgetary practices and budgetary solvency (multiyear budgetary practices and service level solvency) as hypothesized in the study. Qualitative findings further corroborate how institutional impreciseness moderates municipal weak annual budgetary practices to remain solvent for their continued existence and shed more light on why multiyear budgetary practices suffer from weaknesses thus provide better explanations on how municipalities in Bangladesh despite having weaknesses in their budgetary practices survive at the expense of their service level solvency. Theoretically, this thesis enhances the literature as the measurement of financial conditions in one hand enhances the applicability of using indicators existed in the literature in measuring the index, on the other hand investigations of the influences of various socio-economic, demographic, organizational, managerial factors, management control systems, and budgetary practices assist to have deeper understanding on how these factors lead to the determination of municipal financial conditions. Practically, policy makers will find these results useful in devising effective transfer policy and monitoring the financial conditions of municipalities, managers can derive significant benefits by appreciating the necessity of developing required managerial and organizational attributes, and fostering and institutionalizing management control systems and practices to achieve and maintain sound financial conditions for sustainable municipal services. Future research may be carried out by incorporating other relevant variables in the models developed or by looking at similar issues with a sample of similar local governments from other comparable developing countries