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European Journal of Economic and Financial Research ISSN: 2501-9430 ISSN-L: 2501-9430 Available on-line at: http://www.oapub.org/soc Volume 2 │ Issue 5│ 2017 doi: 10.5281/zenodo.1069123 IMPACT OF FACTORY MODEL CULTIVATION ON TEA INPUT AND OUTPUT QUALITY: A STUDY IN SELECTED TEA FACTORIES IN RUHUNU REGION, SRI LANKA Samanga, R., Sachitra, V.i Department of Commerce, Faculty of Management Studies and Commerce, University of Sri Jayewardenepura, Sri Lanka Abstract: The tea industry has long been acknowledged as a major source of livelihood in Sri Lanka with regards as the biggest provider of employment, export earnings and government revenue. Kenya, India, China, Vietnam, Malawi and Indonesia are emerging as competitors for Sri Lankan tea industry in the international market. Ceylon tea still has golden opportunity to compete in the global tea market with respect to high quality tea products. Factory model cultivation is initiated to encourage tea factories to control their tea input quality, in turn improves tea output quality. Based on this premise, this study aims to identify the impact of factory model cultivation on tea input and output quality of tea factories in Sri Lanka. An empirical investigation was conducted on a sample comprising 74 tea factories in Ruhunu region, Sri Lanka. A personally-administered structured questionnaire was used to collect data. The independent sample t-test and the multiple regression analysis were employed to test the hypotheses. The findings offer useful insights not only in terms of understanding the link between tea input quality and output quality of tea production, but also the impact of factory model plantation on controllability of the external suppliers input quality. The study has extended the understanding of the extent of applicability of the factory model cultivation to upgrade input and output quality of tea as well as controlling abilities towards input quality of external suppliers. JEL: O13, Q18, Q15 Copyright © The Author(s). All Rights Reserved. © 2015 – 2017 Open Access Publishing Group 127 Samanga, R., Sachitra, V. IMPACT OF FACTORY MODEL CULTIVATION ON TEA INPUT AND OUTPUT QUALITY: A STUDY IN SELECTED TEA FACTORIES IN RUHUNU REGION, SRI LANKA Keywords: Ceylon tea; factory model cultivation; input and output quality; Galle district 1. Introduction Tea is one of the major drinks of ordinary people in the world. For Sri Lanka, tea industry still continues to occupy an important place in the economy, even though the relative contribution has declined in recent years. For more than a century, tea industry has been the biggest provider of employment, export earnings and government revenue. The tea exports account for about 15% percent for the total exports and about 65% contributes for the total agriculture exports in the country (Central Bank Report, 2015). The tea sector is expected to achieve the export target of US $ 3,000 Million in year 2020. Table 1 illustrates that the export revenue has been increased over the last two years and slightly dropped in year 2015 due to the economic crisis in few top importing countries. Table 1: Ceylon Tea Products Export Performance Year 2007 Export 1025.11 Value* *US $ million 2008 2009 2010 2011 2012 2013 2014 2015 2016 1271.06 1185.43 1439.16 14776.18 1397.92 1526.74 1609.71 1324.51 1144.11 Source: Central Bank Reports, Sri Lanka According to Chang (2015), Kenya, India, China, Vietnam, Malawi and other tea producing countries are exporting bulk as well as value added tea at a lower price comparing with Sri Lanka. Hence, the competition among exporting countries is taking place on price not on quality. This is one of the foremost reasons of declining in competitiveness of Sri Lankan tea in the global market due to the popularity of the CTC (cut, tear and curl) tea it produces and has been capturing many markets due to the higher demand for CTC tea at low price. Although the competitive activities of Vietnam and Indonesia are insignificant for Sri Lankan tea industry, they are emerging as competitors for Sri Lankan tea industry in the international market. However, Sri Lanka is producing orthodox tea which is higher price with high quality when compare with other orthodox tea producers such as Vietnam and Indonesia whose price is cheaper than Sri Lankan orthodox tea (Dulekha, 2008). Further, it has been identified that ultimate consumers need value for money so that most of the developed countries’ consumers demand for quality tea from overseas European Journal of Economic and Financial Research - Volume 2 │ Issue 5 │ 2017 128 Samanga, R., Sachitra, V. IMPACT OF FACTORY MODEL CULTIVATION ON TEA INPUT AND OUTPUT QUALITY: A STUDY IN SELECTED TEA FACTORIES IN RUHUNU REGION, SRI LANKA retailers. Then, the overseas retailers will demand premium quality tea for gaining brand loyalty from their customers (Outschoorn, 2000). The Sri Lankan Tea industry maintains the highest quality in the world market and ISO 3720 is the minimum standard applied for the products. The Country has the capability to produce the cleanest tea in the world in terms of minimum pesticides and residues (Wijeratne, 2003). Therefore, Sri Lankan tea has been identified as an ozone free tea in the world trade. Sri Lanka is also adjusting well to the stringent ISO 22000 series and to the health and safety regulations stipulated by the European Community (Colombo Tea Traders’ Association, 2017). In this way, still Ceylon tea has golden opportunity to compete in the global tea market with respect to high quality tea products. In order to produce high quality output, it is essential to have high quality input and high-quality production process (Botheju et al., 2000). The main input of tea product is tea leave. There are key factors that determine the quality of tea leaves namely plucking standards (B+2 and B+3 plucking standards two leaves and a bud and three leaves and a bud), harvesting interval (7 and 10 days intervals), storing in plucking basket and speedy removal of the leaves to the factory (Sylvestre et al., 2014). There are prior studies conducted to determine the effect of required standards on both quantity and quality of tea green leaves. Sylvestre et al. (2014) revealed that the appropriate harvesting interval for quality and quantity of green leaves is range between 10 and 13 days. Botheju et al. (2000) indicated that Normal plucking standard executed significantly high quantity of production than the B+2 and B+3 plucking standards. However, the quality of the teas produced by adopting the B+2 and B+3 plucking standard was significantly higher than teas from normal plucking. Further, it was vital to pluck 2-3 tender leaves that are free of physical damage in order to produce quality tea. Tender leaf is usually defined as good leaf or the standard shoot because it contains 20% more polyphenols than mature leaf (Karunaratne et al., 2014). Hence, it is emphasised that in order to obtain high quality tea product, tea factories need to acquire high quality tea leaves. With respect to input factor, there are main six principal regions planting tea in Sri Lanka such as Nuwara Eliya, Dimbula, Kandy, Udapussellawa, Uva Province and Southern Province (Tea Board Statistics, 2015). Based on the six principal regions, tea planted areas are categorised into three elevations as shown in Table 2. 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