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The USV Annals


of Economics and
Public Administration
VOLUME 13, ISSUE 2(18), 2013

Editura Universităţii Ştefan cel Mare din Suceava

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The USV Annals of Economics and Public Administration Volume 13, Issue 2(18), 2013

EDITORIAL BOARD:
Editor‐in‐chief: Carmen NĂSTASE 
Executive editor: Adrian Liviu SCUTARIU 
Editors: Elena HLACIUC, Carmen CHAŞOVSCHI, Florin BOGHEAN, Mariana LUPAN,  
Ovidiu Florin HURJUI, Simona BUTA 

SCIENTIFIC COMMITTEE:
Angela ALBU, „Ştefan cel Mare” University of Suceava, Romania 
Paolo ANDREI, University of Studies in Parma, Italy 
Stefano AZZALI, University of Studies in Parma, Italiy 
George P. BABU, University of Southern Mississippi, USA 
Christian BAUMGARTNER, International Friends of Nature, Austria 
Grigore BELOSTECINIC, ASEM, Chi şinău, Republic of Moldova 
Ionel BOSTAN, „Alexandru Ioan Cuza” University of Iaşi, Romania 
Aurel BURCIU, „Ştefan cel Mare” University of Suceava, Romania 
Gheorghe CÂRSTEA, Academy of Economic Studies, Bucharest , Romania 
Slobodan CEROVIC, Singidunum University, Belgrade, Serbia 
Simion CERTAN, State University of Chişinău, Republic of Moldova 
Carmen CHAŞOVSCHI, „Ştefan cel Mare” University of Suceava, Romania 
Liliana ELMAZI, Tirana University, Albania 
Manuela Rodica GOGONEA, Academy of Economic Studies, Bucuresti, Romania 
Cristian Valentin HAPENCIUC, „Ştefan cel Mare” University of Suceava, Romania 
Elena HLACIUC, „Ştefan cel Mare” University of Suceava, Romania 
Elena IFTIME, „Ştefan cel Mare” University of Suceava, Romania 
Marian JALENCU, State University of Chişinău, Republic of Moldova 
Miika KAJANUS, Savonia University of Applied Sciences, Iisalmi, Finland 
Alunica MORARIU, „Ştefan cel Mare” University of Suceava, Romania 
Maria MUREŞAN, Academy of Economic Studies, Bucuresti, Romania 
Carmen NĂSTASE, „Ştefan cel Mare” University of Suceava, Roman ia 
Alexandru NEDELEA, „Ştefan cel Mare” University of Suceava, Romania 
Ion PÂRŢACHI, ASEM, Chişinău, Republic of Moldova 
Rusalim PETRIŞ, „Ştefan cel Mare” University of Suceava, Romania 
Abraham PIZAM, University of Central Florida, Orlando, Florida 
Ion POHOAŢĂ, „Alexandru Ioan Cuza” University of Iaşi, Romania 
Gabriela PRELIPCEAN, „Ştefan cel Mare” University of Suceava, Romania 
Gheorghe SANDU, „Ştefan cel Mare” University of Suceava, Romania 
Petru SANDU, Elizabethtown College, Pennsylvania, USA 
Doru TILIUŢE, „Ştefan cel Mare” University of Suceava, Romania 
Viorel ŢURCANU, ASEM, Chişinău, Republic of Moldova 
Diego VARELA PEDREIRA, University of A Coruna, Spain 
Răzvan VIORESCU, „Ştefan cel Mare” University of Suceava, Romania 
Marian ZAHARIA, Petroleum‐Gas University of Ploiești, Romania 

Cover design & graphic layout: Adrian Liviu SCUTARIU

Contact: Întreaga răspundere


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Str. Universităţii nr. 13, Corp H, Birou H105, 720229 SUCEAVA, ROMANIA
autorilor.
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Journal web site: www.annals.seap.usv.ro for the content of the
Faculty web site: www.seap.usv.ro published articles rests
University web site: www.usv.ro with the authors.

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of Economics and Issue 2(18),
Public Administration 2013

CONTENTS

SECTION 1. ECONOMY, TRADE, SERVICES...................................................................................................6



STATISTICAL ANALISYS OF EVOLUTIONS OF DEMAND AND SUPPLY OF AGRO‐TOURISTIC BOARDING HOUSES
IN 2000 ‐ 2012 PERIOD .......................................................................................................................................................................................7
Rodica Manuela GOGONEA, Marian ZAHARIA

ECONOMIC AND SOCIAL IMPLICATIONS OF GLOBALIZATION......................................................................................................17
Oana CHINDRIS‐VASIOIU

POWER‐SHIFTS IN THE GLOBAL ECONOMY. TRANSITION TOWARDS A MULTIPOLAR WORLD ORDER................24
Ion IGNAT, Gimia‐Virginia BUJANCĂ

ANALYSIS OF THE FACTORS AFFECTING THE AVERAGE LABOUR PRODUCTIVITY VARIATION IN AGRICULTURE,
FORESTRY AND FISHING IN ROMANIA.....................................................................................................................................................35
Carmen BOGHEAN, Mihaela STATE

EMPIRICAL REFLECTIONS ON MIGRATION PHENOMENON. MAJOR EFFECTS OF MIGRATION ON THE HUMAN
CAPITAL...................................................................................................................................................................................................................42
Simona BUTA, Rozalia Iuliana KICSI

THE PLACE OF E.U. TOURISM WITHIN THE FRAME OF WOLRD TOURISM.............................................................................48
Adrian Liviu SCUTARIU

FOREIGN DIRECT INVESTMENTS IN ROMANIA AFTER THE EU ADHESION...........................................................................56
Laura DIACONU (MAXIM)

UKRAINIAN‐LATVIAN ECONOMIC COOPERATION..............................................................................................................................63
Semen KHOROSHENIUK

DISPROPORTIONS IN THE WORLD ECONOMY……………………………………………………………………………………………….70
Anatolii VDOVICHEN

DISPROPORTIONS IN THE WORLD ECONOMY......................................................................................................................................76
Victor BAZILEVICH, Yuriy UMANTSIV

IMPACT OF ECONOMIC CRISIS ON WOOD MARKETS (CONSUMPTION, PRODUCTION AND TRADE).........................86
Maria‐Loredana POPESCU, Antoniu PREDESCU, Mihaela‐Diana OANCEA‐NEGESCU

THE IMPACT OF CORPORATE SOCIAL RESPONSIBILITY ON CORPORATE VALUE............................................................. 91
Diana DOBRESCU

STUDY ABOUT STUDENTS’ ENTREPRENEURSHIP SPIRIT............................................................................................................ 102
Elena ZAMCU

SECTION 2. MANAGEMENT AND BUSINESS ADMINISTRATION ................................................ 108

STRATEGIC INTELLIGENCE ROLE IN THE MANAGEMENT OF ORGANIZATIONS .............................................................. 109
Ioan PETRIŞOR, Natalia Ana STRĂIN (SILAŞ)

A CONCEPTUAL FRAMEWORK FOR SUSTAINABLE POULTRY SUPPLY CHAIN MODEL.................................................. 117
Mohammad SHAMSUDDOHA, Alexandru NEDELEA

RESEARCH RESOURCES FOR AN EFFICIENT ROMANIAN‐GERMAN COMMUNICATION IN THE FIELDS OF LAW
AND ADMINISTRATION................................................................................................................................................................................. 124
Carol Alexandru MOHR, Carmen CHAŞOVSCHI

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DETERMINANTS OF PATIENT SATISFACTION (PS) IN PUBLIC HEALTH SERVICE ORGANIZATIONS (PHSO) IN
EASTERN PROVINCE OF SRI LANKA ....................................................................................................................................................... 135
Mohideen Bawa Mohamed ISMAIL, Thirunavukkarasu VELNAMPY

LEADERSHIP APPROACHES REGARDING THE ORGANIZATIONAL CHANGE....................................................................... 146
Camelia BĂEŞU, Ruxandra BEJINARU

SECTION 3. ACCOUNTING – FINANCES .................................................................................................. 153

THE FORECAST OF BANKRUPTCY RISK USING ALTMAN MODEL............................................................................................. 154
Mihai Bogdan PETRISOR, Dan LUPU

PERFORMANCE MANAGEMENT COMPONENT OF CORPORATE GOVERNANCE IN THE CENTURY OF SPEED.... 162
Florin BOGHEAN

PROFESSIONAL COMPETITIVE EVOLUTION AND QUANTIFICATION MODELS IN ACCOUNTING SERVICE
ELABORATION................................................................................................................................................................................................... 169
Gheorghe FATACEAN

THE STRUCTURAL DEFICIT – A NEW MEASURE FOR FISCAL DISCIPLINE IN THE EURO AREA ................................ 174
Cristina PUIU

ANALYSIS OF THE INSOLVENCY OF ROMANIAN COMPANIES IN THE CONTEXT OF THE ECONOMIC CRISIS..... 183
Daniela CIOTINA, Ioan Marius CIOTINA

THE IMPACT OF NEW REGULATION ON FOUR EUROPEAN BANKING SYSTEMS. A BASEL III APPROACH ........... 193
Anamaria AVADANEI

THE ROLE OF ACCOUNTING SYSTEM CLASSIFICATION IN THE OPTIMIZATION OF INTERNATIONAL
HARMONISATION PROCESS........................................................................................................................................................................ 200
Geanina MĂCIUCĂ, Marian SOCOLIUC

SECTION 4. STATISTICS, ECONOMIC INFORMATICS AND MATHEMATICS ......................... 207

INTERNET OF THINGS – SOME ETHICAL ISSUES .............................................................................................................................. 208
Daniela POPESCUL, Mircea GEORGESCU

AUGMENTED REALITY ‐ STATE OF KNOWLEDGE, USE AND EXPERIMENTATION........................................................... 215
Mihaela Filofteia TUTUNEA

AN ADVERTISING OLIGOPOLY ................................................................................................................................................................... 228
Alina Irina GHIRVU

SECTION 5. LAW AND PUBLIC ADMINISTRATION............................................................................. 239

PUBLIC SECTOR of CANADA: RATING RESEARCH of LABOUR.................................................................................................... 240
Olesia Leontiivna TOTSKA

CONSIDERATIONS REGARDING THE INTERPRETATION OF LEGAL NORM ......................................................................... 245
Camelia IGNĂTESCU

STUDY CONCERNING THE EXECUTION OF LOCAL BUDGETS REVENUES............................................................................. 249
Cristinel ICHIM

THE MEASURES OF CONSTRAINT IN THE INTERNATIONAL LAW........................................................................................... 256
Dumitriţa FLOREA, Narcisa GALES

ORGANIZATION IN CONTEMPORARY PUBLIC SPHERE ................................................................................................................. 265
Rosemarie HAINES

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MANAGERIAL PRINCIPLES APPLICABLE IN LOCAL PUBLIC ADMINISTRATION ‐ MEANING AND CONTENT ..... 275
Petronela ZAHARIA

ARTICLES AND MEMORANDUM OF ASSOCIATION OF THE LIMITED LIABILITY COMPANY ....................................... 281
Eugenia‐Gabriela LEUCIUC, Anca POPESCU‐CRUCERU

A COMPARISON BETWEEN THE MAGNA CHARTA LIBERTATUM AND THE FREEDOM CHARTA FROM
BUCHAREST IN 1631 AND THE PROBLEM OF A POSSIBLE FOUNDING DOCUMENT OF THE ROMANIAN MODERN
CONSTITUTIONALISM.................................................................................................................................................................................... 286
Lucian Sorin STANESCU

PRINCIPLE OF AVAILABILITY IN THE MATTER OF THE REDUCIBILITY OF THE PENALTY CLAUSE....................... 297
Maria DUMITRU

PUBLIC INTEGRITY AND THE DIVERGENCE FROM IT.................................................................................................................... 303
Simona‐Roxana ULMAN

BOOK REVIEW........................................................................................................................................................ 312

BOOK REVIEW FOR ‐ MARKETING IN THE FIELD OF INTERNATIONAL BUSINESS ‐ STRATEGIC AND PRACTICAL
APPROACHES, AUTHOR ANDREEA DANIELA GANGONE................................................................................................................ 313
Carmen NĂSTASE

INSTRUCŢIUNI UTILE PENTRU AUTORI / AUTHOR GUIDELINES............................................ 315

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Public Administration 2013

SECTION 1

ECONOMY, TRADE, SERVICES

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of Economics and Issue 2(18),
Public Administration 2013

STATISTICAL ANALISYS OF EVOLUTIONS OF DEMAND AND


SUPPLY OF AGRO-TOURISTIC BOARDING HOUSES IN 2000 -
2012 PERIOD
Associate Professor Ph.D. Rodica Manuela GOGONEA
The Academy of Economic Studies, Bucharest, Romania
manuela.gogonea@gmail.com

Professor Ph.D. Marian ZAHARIA
“Petrol‐Gaze” University of Ploiesti, Romania
marianzaharia53@gmail.com

Abstract:
In the communist period in Romania international tourism was very strictly controlled. The domestic tourism,
however, was developed to some extent in the years 70, but will have a decline in the 80s as a result of state control
over the quota of fuel that can access an individual. The overwhelming majority of places to accommodate were offered
by hotels, motels and campgrounds. After the fall of communism and the transition to the free movement of persons and
gradually to a market economy began to emerge and develop tourist pensions. At the same time, reducing the working
week, increased leisure time of individuals, has accelerated the development of tourism and increasing demand for
overnight places. On the other hand, the concentration of population in urban centers has developed, in individuals, the
need to escape in nature, in the countryside, on weekends or holidays, which have led to the development of rural
tourism and agro-tourism. Based on these considerations, this paper captures the development of rural tourism demand
and supply of accommodation places in agro-touristic boarding houses, in the period 2000-2012.

Key words: agro-touristic boarding houses, accommodation capacity, tourist arrivals, overnight stays,
development regions

JEL classification: C25, L83, O18, R20

INTRODUCTION

Tourism is undoubtedly one of the most important factors of economic growth, job creation
and improved quality of life. If before 1990 in Romania, as in other former communist countries,
international tourism has been kept under very strict control, the changes faced by Romania with the
transition to a market economy, implicitly influenced the tourism. “The presence of private property
was felt especially by small accommodation units, such as the touristic barding house and agro-
touristic households. The growth in number of these types of units was duet o a very attractive
legislative initiative” (Hapenciuc C.V., 2006, pp.211-212).
The relatively low level of capital required to develop a tourism business and the great
potential of Romania are factors that begin to lead the development of mass tourism. „While in
Romania effects of mass tourism development are not yet as strong as in the Mediterranean or Latin
American countries, we can already think of possible future implications of increased flow of
foreign tourists” ( Babucea A.G. et.al., 2012)
The strong development of communication and free circulation of individuals in the EU are
important factors of development of tourism and thus of significant rhythms of development of the
rural tourism (Bălăcescu A., Răbonţu C.I., 2010) Generalization of Internet, both by developing
infrastructure and facilitating individuals' access to the Internet, and fosters distribution of tourist
services in Europe (Condratov I., 2006) and implicitly in Romania, although in this point of view
we are, with Bulgaria, on the last place in UE28 (Enăchescu D. and Zaharia M.,2013).
At the same time, at least where young people, has had a process of skills development on
Internet use in the acquisition of touristic services. Take place thus, a process of phasing out the
intermediate links, a process that favors both the supply and demand for tourist services. Definitely,
the tourism and the agro-tourism must be visible on the internet. Additional costs caused by this,

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The USV Annals of Economics and Public Administration Volume 13, Issue 2(18), 2013

can be recovered by increasing the number of arrivals and overnight stays, and thus revenue of
boarding houses.
Another important factor in the development of rural tourism is the changes in consumer
behavior, driven indirectly by strong urbanization and concentration of population in urban centers
increasingly higher. As a direct consequence, the behavior of the population of these urban centers
there is a need to escape from everyday life in order to change the holiday destination for those
active, mainly conducted in nature, which has significant implications for rural tourism activities. In
these conditions "the most popular accommodation and food - hotels, respectively restaurants
gradually loses its importance in favor of new forms of accommodation and food - boarding houses,
much better integrated into the natural environment of these areas”( Stanciu P., 2006, p.447)
On the other hand, the tourism development may have a large involved on the environment,
particularly in protected areas. The development of rural tourism and agro-tourism should take
account a series of factors (Nastase C., 2006) among which conservation, diversification, working
with rural, tourism as a tool and empowerment and local control.
Last but not least, the tourism sector has proven to be a sector less affected by the economic
crisis started in 2009, so “Romanian tourism managed to have indicators with positive evolution, it
can be an activity for which the exit from the crisis does not represent an objective difficult to be
achieved, and it can quickly restore other sectors, covered by the multiplier effect of
tourism”(Răbonţu C.I., Vasilescu M., 2012).
Given the economic and social changes faced by Romania during the transition years, in
time, there have been changes in the classification of tourist units which performing activities rural
tourism. This is one of the reasons restricting the analyzed period to 2000 - 2012, the period for
which data are provided by National Institute of Statistics from Romania
Statistical Office of the European Union (EUROSTAT) has developed and included in the
REGIO database, Nomenclature of Territorial Units for Statistics (NUTS) in order to homogenize
regional territorial units for statistics in EU. Territorial units NUTS are now structured
hierarchically in three levels: NUTS 1 (97 regions), NUTS 2 (271 regions) and NUTS 3 (1303
regions). In Romania as a result their accessions to the EU, the three NUTS levels have the
following structure (EC No.176/2008): NUTS 1, 4 macro, NUTS 2, 8 regions, and NUTS 3, the
counties in each region. The following chapters analyze the evolution of agro-tourism activity based
on this structure..

EVOLUTION AND DISTRIBUTION OF THE TOURISTIC ACCOMMODATION


CAPACITY IN OPERATION OF AGRO-TOURISTIC BOARDING HOUSES IN THE
PERIOD 2000-2012

The touristic accommodation capacity in operation is defined by the Yearbook, published by


National Institute of Statistics of Romania (ASR 2012, p.579), as “the number of available
accommodation places for tourists in establishments of touristic reception with functions of touristic
accommodation, multiplied with the number of days when the establishments are opened during the
respective period. The places in rooms or establishments temporarily closed because of lack of
tourists, for repairs or other reasons, are excluded.”

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The USV Annals of Economics and Public Administration Volume 13, Issue 2(18), 2013

30000
27453
25000
19783
20000 20683
16906

TACOABH
14551 20208
15000
11151 15448

10000 7510
4748 9405
5000
6219
3544
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Figure 1 – The evolution of the touristic accommodation capacity in operation of the


agro-touristic boarding houses in Romania in the period 2000-2012

The evolution of the Touristic Accommodation Capacity in Operation of the Agro-touristic


Boarding Houses (TACOABH) in Romania in the period 2000-2012 is shown in Figure 1. The
increasing trend of places offered by agro hostels in Romania is highlighted by the fact that the
average absolute increase is approximately 1992 places annually, and the relative increase is
18.60% per annum.
As can be seen, in 2000-2005, the increase was almost linear, with annual values between
1204, in 2001, and 1895 accommodation places in 2004. In the period of economic growth, in 2006,
TACOABH recorded the highest value from before the economic crisis (3400 accommodation
place), double the previous year, followed by slow growth (897 accommodation places in 2007).
The process creation of new accommodation places, feel the economic crisis in 2010 and 2011,
years in which, in Romania, TACOABH growths only 425 accommodation places annually.
Finally, the year 2012 brings a strong revival, TACOABH increasing by 6770 accommodation
places, more than double the highest value recorded in the analyzed period.
At development regions level, the evolutions of TACOABH differ significantly. TACOABH
evolutions in the 8 development regions in Romania are shown in Figure 2.
The most significant increase of TACOABH was registered in the Center region, which
evolved from the 1619 existing places in 2000 to 10073 seats in 2012, representing in the whole, an
average increase of approximately 705 seats per year, which, in relative value is evidenced by the
average rate of 16.46% per annum. The region has a significant tourism heritage for the practice of
agro-tourism including Sovata, Praid, Borsec, Vâlcele, Bran, Moeciu, Fundata, Predeal, Poiana
Braşov precum şi Sibiel, Sălişte, Gura Râului, Tălmaciu, the corridor Rucăr–Bran, alpine roads
Tranfăgărăşan and Transalpina.

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10000

T A C O A B H b y re g io n s 8000

6000

4000

2000

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
North-West Center North-East South-East
South-Muntenia Bucharest - Ilfov South-West Oltenia West
Figure 2 – The evolution of the touristic accommodation capacity in operation of the
agro-touristic boarding houses by development regions in the period 2000-2012

In second place there is the North-East development region. In this region, the values of
TACOABH increased from 526 seats in 2000, to 4817 seats in 2012, which represents a relative
mean increase of 20.27% on the year 2000. This trend was due to enhancement of the valuable
tourism potential of this development regions, among which the monasteries, Putna Suceviţa,
Moldova, Humor, Voroneţ, Agapia, the health resorts Vatra Dornei and Durău, mountain ranges
Giumalău and Rarău, as well Bicaz Canyon.
In third place, in terms of the increase in the values of TACOABH, there is the North-West
development region, in wich, in 2000 there were registered 308 places in agro-touristic boarding
houses, and where in 2012 recorded 4326 places, which representing an average increase relative to
2000 by 24.63% per year, the average increase equivalent to an increase of approximately 335
accommodations places per annum. The increases of TACOABH value have been driven by the
development of health tourism (Baile Felix, Baile 1 Mai, Stana de Vale), of the mountain tourism,
the caves Vadu Crisului and Fortress of Ponor, the natural parks from Apuseni and Rodna
Mountains, of the rural tourism in Oas and Maramures countries and not only.
Less spectacular increases of TACOABH values were recorded in the development regions
South-East, South-Muntenia, South-West Oltenia and West. In the South East region, TACOABH
evolved from 697 seats in 2000, to 2047 seats in 2012, the relative average increase of 9.39% per
annum being equivalent to about 113 seats per annum. Fairly low level of existing accommodation
capacity recorded in this region over the analyzed period, is because it include Constanta county,
where rural tourism is very low. On the other hand, the Danube Delta is an attractive tourist area in
the region that lends itself well to the practice of rural tourism, and which in recent years has begun
to develop.
A somewhat similar situation was recorded in the South development region, where, the
tourist accommodation capacity in operation of agro-touristic boarding houses increased by about
174 seats per annum, an average rate of increase to 19.75% per annum, in the period 2000-2012
These increases are mainly driven by development of rural tourism in Prahova, Dâmboviţa and
Arges.
In the South-West Oltenia development region the values of TACOABH increased from 38
places in 2000, to1695 places in 2012, representing an average rate of increase of 37.23% annually
and an absolute average increase about 138 seats per annum. The increase was driven by the
tourism potential of Gorj (the caves Cloşani, Ponoare, the monasteries Tismana Polovraci, Lainici),
of Mehedinti (National Park Domogled-Cerna Valley) and of Valcea (the health resorts Olanesti,
Călimăneşti, Căciulata and Govora, the monasteries Curtea de Arges, Horezu and Cizia).

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In the West development region in 2000, TACOABH record 77 places and 2073 places in
2012, which represents a average rate of increase of 31.58% annually about 166 pleaces per annum.
Here we can mention the health resorts Herculane, Crivaia, Buziaş Moneasa, Lipova and Călacea,
national parks Nera - Beuşniţa, Semenic – Caraş Canyon, Domogled - Cerna Valley, Iron Gates
Natural Park, and the mountains Retezat and Parang. Also, for this region, its potential is favorable
for the development of rural tourism.
Very small increases of TACOABH values were recorded in the Bucharest-Ilfov development
region. Here TACOABH appears in the statistics since 2003 with a value of 23 places and will
reach 65 places in 2012. The average increase is about 5 places per year. Now, this region is not a
area for the rural tourism.

EVOLUTION OF THE TOURIST ARRIVALS IN AGRO-TURISTIC


GUESTHOUSES IN THE PERIOD 2000-2012

The second analyzed indicator is the Number of Tourists Arrivals in Agro-touristic Boarding
Houses (NTAABH). It refers to persons who travel outside the localities in which they reside for a
period of less than 12 months and spend at least one night in a tourist accommodation in areas
visited in the country, for other reasons than that of gainfully employed in places visited. The
evolution of NTAABH values in total agro-touristic boarding houses in Romania in the period
2000-2012 is shown in Figure 3.

500000
447113

400000
357617
325686 360696
300000
NTAABH

288508 289923
217020
200000
148985 170164
100000
28152 89446
41658 64811
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Figure 3 – The evolution of the touristic arrivals in agro-touristic boarding houses in


Romania in the period 2000-2012

The chronogram show the evolution of NTAABH values in Romania, in the period in which,
except for the period 2008-2010, as if of TACOABH values, record increases, only that the average
growth rate (25.92% annually) is bigger than for TACOABH. The absolute average increase is
about 34,913 tourists annually. In the period 2000-2008 the value of NTAABH increased
continuously with an average annual rate of 37.40%. During this period, the lowest growth rate of
NTAABH was recorded in 2005 (14.22% compared to 2004), and the highest in 2004 (66.56%
compared to 2003).
The economic crisis that started in 2009 had a significant impact on tourist traffic. The
number of tourist arrivals fell by 31931 in 2009 and 35673 still tourists in 2010, so that in two years
the reduction was 18.93%. Starting with 2010 there has been a revival of tourist traffic, NTAABH
registered in Romania in 2010, slightly above (3079 people) value recorded by NTAABH in 2008.
In 2012, this process increases in intensity (the absolute increase of 86,417 tourists compared to
70,773 tourists, increase recorded in 2011). Compared to 2000, in 2012 the number of tourists

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The USV Annals of Economics and Public Administration Volume 13, Issue 2(18), 2013

arriving in agro-touristic boarding houses in Romania was 15.88 times higher. It is a significant
increase.

160000

140000

120000
NTAABH by regions

100000

80000

60000

40000

20000

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
North-West Center North-East South-East
South-Muntenia Bucharest - Ilfov South-West Oltenia West

Figure 4 – Evolution of the number of touristic arrivals in agro-touristic boarding


houses by development region in the period 2000-2012

Regarding the developments of NTAABH values on development regions in Romania (Figure


4) also they recorded different rates. As can be seen, the values of NTAABH developments
registered in the regions Central, North-East and North-West since 2003 and 2004 are moving away
from the evolution of the NTAABH values recorded in other regions. Between the three
development regions, the least affected by the crisis was North-East region and the hardest hit was
the North-West region. Although affected by the crisis in 2009 and 2010, the Center region, from
2011, NTAABH registers the highest growth rates

Figure 5 – Distribution of the number of touristic arrivals in agro-touristic boarding


houses by development region from Romania in the years 2003 and 2012

To highlight the evolution of preferences tourists visiting the touristic potential and
accommodation in different development regions in Romania, Figure 5 shows the distribution of the
number of touristic arrivals in agro-touristic boarding houses by development region from Romania
in the years 2003 and 2012. Looking at the graphs it is observed that the share of the total number
of touristic arrivals by region is close to the value of percentages of the existing accommodation
capacity of agro-touristic boarding houses in Romania.

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In 2003, in the top of tourists preferences, are the Centre region, in which were
accommodated nearly half (41%) of the number of tourists arrived in agro-touristic boarding houses
in Romania. In the second place, but at a value of 2.7 times less is the North-East region. In 2003,in
these two development regions, were accommodated, 56% of tourists. On the following places
were the development regions South-East (14%), South-Muntenia (12%) and North-West (10%),
which attracted 36% of all tourists accommodated in agro-touristic boarding houses. Compared to
this, in the development regions West and South-West Oltenia were accommodated 5% and 7%
respectively of the total. In the Bucharest-Ilfov the percentage of tourists accommodated in agro-
touristic boarding houses, in 2003, was below 1%.
Comparison with the values recorded in 2003, in 2012 shall be recorded changes in both the
hierarchy and percentage values. Although Central and North-East regions remain, and in 2012, the
first places with over 50% of all tourists accommodated in the agro-touristic boarding houses , the
Center region lost 5 percentage points in value registered in 2003, tourists preferring other areas. In
the North-East region the percentage of tourists accommodated in agro-touristic boarding houses,
increase from 15% in 2003, to 18% in 2012.
Significant increases are also recorded in three development regions: the North-West region
(6 percentage points) that reaches from 5th place, to 3rd place, the West region (3 percentage
points) and the South West Oltenia region where the percentage of those accommodated in the
agro-touristic boarding houses doubles. This highlights the a better promotion of the tourist
potential of their regions, and of agro-touristic boarding houses supply also
On the other hand shall be recorded significant decreases in percentages of tourists
accommodated in agro-touristic boarding houses in South-East region (from 14% in 2003 to 7% in
2012) and South-Muntenia (from 12% in 2003 to 9 % in 2012). Regarding the Bucharest-Ilfov
development region, the percentage of tourists accommodated in the agro-touristic boarding houses
remains still below 1%.

ANALISYS OF THE CORRELATION BETWEEN ACCOMMODATION CAPACITY


IN OPERATION AND THE NUMBER OF TOURISTIC ARRIVALS

In general, relations between phenomena are based on the fact that every phenomenon occurs
under the influence of several factors, some essential and others with less influence and less
significant. Research on these links is based either on the use of simple methods and ways of
interpreting the links, or the applicable analytical methods by using mathematical functions and
procedures.
In this chapter we stop on the correlation analysis of existing accommodation capacity in
agro-touristic boarding houses (EACABH) and the number of arrivals in agro-touristic boarding
houses (NTAABH) from Romania.
For this we chose EACABH as the dependent variable (the result) and NTAABH as an
independent variable (factor). Graphical representation of the function:

EACABH  f NTAABH    (1)

is presented in figure 6. On first examination, taking into account the distribution of empirical
values, we believe that the dependence of EACABH and NTAABH is linear, f NTAABH  being
shaped f x   aˆ  bˆx . We note, however, that there are fore significant deviations from the
regression line AB, denoted D1, D2, D3 and D4. To check the linearity assumption on the
dependence between the two variables, a significance level, we test the hypothesis:
H 0 : There is no linear dependence between EACABH and NTAABH
H 1 : Between EACABH and NTAABH is significant linear dependence

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The results are shown in Table 1. Value of Multiple R  0.9734 confirms the existence of strong
direct link between the two indicators analyzed. Also, the value of R Square  0.9474 indicates that
the decision of investors who wish to develop rural tourism is influenced significantly (90%) of the
evolution of the number of tourists who prefer this kind of tourism. We note, however, that the
small number of observations (13 observations) indicates a certain reserve in generalizing of this
assertion.

Figure 6 – Correlogram of dependence between EACABH and NTAABH

The econometric model is:

f NTAABH  2474.9  0.0514  NTAABH (2)

Given that for model (2), Significan ce F  2.2128 * 10 8  0.05 follows that it is statistically valid
and therefore, regression coefficient bˆ  0.0514 we show that an increase of one unit of NTAABH,
will result an average increase of EACABH of 0, 0514 accommodation places bˆ  0.0433, 0,0594 . In
other words, to sensitize investors to create extra accommodation is necessary to increase the tourist
arrivals in agro-touristic boarding houses by about 20 (between 16.8 and 23.1 tourist arrivals). Of
course this is a general conclusion. In practice must take into account the particular circumstances
in each development region, every county and tourist area. A development and a deepening of this
analysis will be carried out in a forthcoming paper.

Tabel 1- Testing dependence between EACABH and NTAABH

SUMMARY
OUTPUT
Regression Statistics
Adjusted R
Multiple R 0,9734 R Square 0,9474 Square 0,9427
Standard
Error 1740,2770 Observations 13
Observations 13

Significance
ANOVA df SS MS F F
2,21285E-
Regression 1,0000 600498170,7281 600498170,7281 198,2782 08
Residual 11,0000 33314203,5796 3028563,9618
Total 12 633812374,3

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P- Lower Upper
Coefficients Standard Error t Stat value 95% 95%
Intercept 2474,9303 929,6123 2,6623 0,0221 428,8674 4520,9932

NTAABH 0,0514 0,0036 14,0811 2,21E-08 0,0433 0,0594

Regarding the parameter â , given that P  value  0.0221  0.05 , follows that and this is valid,
although in the particular case considered, it has no economic significance.
Given the value of Significan ce F  2.2128 * 10 8  0.05 , the final conclusion is that the
hypothesis H 0 is rejected and is accepted the hypothesis H 1 . Therefore between the existing
accommodation capacity in agro-touristic boarding houses and the number of tourist arrivals in
agro-touristic boarding houses in Romania there is a intense direct correlation.

CONCLUSION

Under the spectrum of political and of socio-economic changes, the evaluation of rural
tourism, highlights recovery efforts in this field. These efforts have led to the emergence of new
tourist accommodation which attempts to present themselves the high quality standards to meet
ever more tourists requirements, reflected the increase registered in the number of tourist arrivals in
agro-touristic boarding houses in most regions. Are significant in this respect, the growth rates
recorded by the development regions Centre, North-East and even North-West where the economic
crisis had a greater impact on the development of rural tourism in 2009-2010.
Another issue that resulted from the analysis, it is the changes in the preferences of tourists
visiting and staying overnight in the agro-touristic boarding houses in developing regions from
Romania. Thus, while in regions like South West, West, North-West and the North-East the
percentage of the tourist arrivals grew, in the others are registered decreases. A special situation is
registered in Bucharest-Ilfov region where rural tourism is virtually nonexistent,
Although not resulting from this analysis, for rural tourism development, road infrastructure
development continues to be a priority item. Also, the adoption of the national level of certain
measures for protected and conservation of the tourism heritage and of the traditional Romanian
villages are absolutely necessary.

REFERENCES

1. ***Regulation (EC) No 176/2008 of the European Parliament and of the Council amending
Regulation (EC) No 1059/2003 on the establishment of a common classification of
territorial units for statistics (NUTS) by reason of the accession of Bulgaria and Romania to
the European Union (20 February 2008)
2. *** INSSE Tempo One-line
https://statistici.insse.ro/shop/index.jsp?page=tempo3&lang=ro&ind=TUR102D
3. Hapenciuc C.V .(2003) - Statistical research in tourism - A study on the touristic
phenomenon in the district of Suceava, ed. Zoloti Litavry, Cernăuţi, Ukraina
4. Hapenciuc C.V. (2006) Politics in tourism development in Suceava district, in Turismul la
începutul mileniului III. Provocări şi tendinţe, ed. Sedcom Libris, Iaşi, pp.209-215.
5. Condratov I. (2006) Analiza statistică privind evoluţia distribuţiei serviciilor turistice în
spaţiul european, prin intermediul internetului, in Turismul la începutul mileniului III.
Provocări şi tendinţe, ed. Sedcom Libris, Iaşi, pp.440-446
6. Constantin M., Costescu M.(2000), Turismul şi dezvoltarea rurală în România, Revista
română de statistică, nr. 11-12, Bucureşti,.
7. Stanciu P. (2006) Studiul pensiunilor turistice din judeţul Suceava, in Turismul la începutul
mileniului III. Provocări şi tendinţe, ed. Sedcom Libris, Iaşi, pp.447-455.

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8. Enăchescu D., Zaharia M. (2013) Electronic commerce in Romania features and dynamics,
IEEE-MIPRO 36th International Convention, May 20-24, Opatija, Croatia, pp.1531-1539
9. Năstase C. (2006) Dezvoltarea durabilă şi turismul durabil, in Turismul la începutul
mileniului III. Provocări şi tendinţe, ed. Sedcom Libris, Iaşi, pp.323-327.
10. Babucea A.G., Răbonţu C.I., Vasile M. (2012) Evolution of the capacity and
accommodation activity at the regional level in Romania after 1990, in Annals of the
„Constantin Brâncuşi” University of Târgu Jiu, Economy Series, Issue 4/2012
11. Răbonţu C.I., Vasile M. (2012) The evolution of romanian tourism in terms of economic
instability, in Annals of the „Constantin Brâncuşi” University of Târgu Jiu, Economy Series,
Issue 2/2012
12. Bălăcescu, A., Răbonţu C.I. (2010) Statistical analysis of the touristic accommodation
capacity and activity in Romania during 2000-2009, Annals of the University of Petroşani,
Economics, 10(4), 2010, pp.19-26
13. http://epp.eurostat.ec.europa.eu/portal/page/portal/nuts_nomenclature/introduction

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of Economics and Issue 2(18),
Public Administration 2013

ECONOMIC AND SOCIAL IMPLICATIONS OF GLOBALIZATION

Lecturer PhD Oana CHINDRIS‐VASIOIU


The Ecological University in Bucharest, Romania
Faculty of Economics
oana_vasioiu@yahoo.com

Abstract:
The confrontation between third millennium will not be between civilizations but between forces of
globalization and global agents. Already live in a global economy, context in which it is necessary to understand by
globalization the modernization process of life world by spreading economic means of production and communication
at world level. Globalization produces a capitalism healthy whereas stimulates competition beneficial between an ever-
increasing number of companies.
Economic and political unification under the global financial corporate banner is accompanied by mixing
spiritual values and return unique realm. After internationalism political correctness (multiculturalism, feminism,
ecological radically) administered Western individualism typical bruising, it seems that the ground is ready for the big
toe-in.
Globalization can be seen as a crucial stage of expansion and economic interdependence. This stage is
completing a process of aggregation of relatively autonomous local economies whose element mainly in the past has
been constant widening of the space for the exchange of each economic savings. Economic renewal based on
knowledge of known but a contrary geospatial evolution. Advances in knowledge are favored and intimately linked to
the possibility of communication. So, they are favored by communication infrastructure and communication
technologies.

Key words: globalization, world economy, liberalization, regionalization, economic integration

JEL classification: F15, F63

I. INTRODUCTION

What is called today's globalization represents, on the one hand, stage reached by the real,
positive, long-lasting process for the development of international evolution economic life, or three
decades and economical exchange and interdependence between national economies and the States.
Trade internationalization, which is characterized by increasing the volume of goods and services
exchanged, was added internationalization production. Globalization means an assembly
increasingly integrated into which the roles of the member-nation remain important, but where
economic movements may not be reduced to international trade.
At the basis of this process is, as I have shown a few essential factors: accelerate
technological change; multiplication and diversification economical exchange; sizzling with
circulating capital; requirements of world market; rapid development of management, Both in
production and in the process of organization of exchange deals, as well as increasing economic
efficiency, on the basis of new technologies and guidelines for organizing economic activity, both
domestic and especially international. Given this side, globalization may is also defined as the
process of modernization of world economic life by spreading of means of production and of
modern communication at world level. (Taşnadi, Doltu, 1999).

II. GLOBALIZATION IN THEORY AND PRACTICE

Globalization includes many risks and contradictions. It is also a process of redistribution of


economic power and the enhancement of social disparities and procurements on a worldwide level.
For this reason, it forms, in particular in the last few years, subject to scenes disputes theoretical-
ideological. As it is revealed in these debates, globalization is legitimated by liberal ideas, spice,
who sees in the market the only economic regulator life, both at national level, as well as to scale

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global economy, Expressing interests and promoting grand capital and is regarded critical of a wide
circle of economists, experts in politics and politicians, that emphasize different facets, diction
contradiction his fighters, of this process. Thus, together with the important role played by free-
wheeling development, spice financing of international trade and rapid circulation of creation of
science and technology contemporary, all countries to access resources, financial spice for
development, are highlighted, before all, Effects of social and economic of this process: increased
economic and social inequalities, national and international; increased competition and unfair forms
of it; the increase in Romanian Nationalist capital financial markets in relation to power
representative bodies, Democratic chosen in each country and affecting national sovereignty.
Globalization has been and is possible due to the measures for the liberalization of trade, the
capital investments and the financial markets influenced in their turn the efforts of regional
economic integration. Although the process of liberalization takes place at different speeds and in
various means, All countries are concerned that their economic relations to constitute part of the
liberalization process since liberalization of trade and the capital investments may promote more
efficient allocation of resources which leads to invigorate economy and welfare. Economic
Integration on a world scale in the first instance it is the result of a governmental policies promoted
consciously of industrialized countries, continued and in the present. (Dachin, 2003)
Globalization cannot be avoided; everywhere there is a need for high technology, capital
investment, management and marketing performance. Any country is concerned for the entry in the
process of globalization positive, by attracting potential capital, in particular in the form direct
investment. However, globalization has and less pleasant. Majority investor may take a decision to
close firms acquired for the purpose of eliminating competition; it may reduce their activity in an
enterprise in a country and to intensify where profits are larger; may promote obtaining goods with
low value-added in one place, when processing top great value added at a subsidiary in another
country. (Gills, James, 2007)
Competition in the global market is very hard; there is nothing more mobile today than its
share capital. International directs investments trade flows, transfers of billions at the speed of light
decide exchange rates, external power for the purchase of a country and of its currency. Engine
trade are no longer differences of relative costs. What matters now is the advantage absolutely in all
markets and in all countries, at the same time.
Globalization, from a theoretical point of view, provides the key to progress, means
transparency, high standards of quality, the protection of the environment; in order to synthesize, it
means everything that contributes to improving the living conditions at the global level. However,
globalization is without prejudice as a matter of fact all benefits and even less benefit in equal
measures all of these states. In the XX century, the average overall income per capita has increased,
but he had a considerable variation from one country to another. Although revenue increased,
inequalities have become more pronounced than they were at the beginning of the twentieth
century. (Turner, Khondker, 2010)
Practically, the impact of globalization on the poor constituted central subject of the report on
the development Worldwide in 1999-2000: entry in the twenty-first century (World Development
Report 1999/2000: Entering the 21st Century. The report shows that based on current projections,
number of the poor will continue to grow. It is estimated that the number of those who will live with
the equivalent of a dollar per day will amount to 1.5 billion, on the rise of 1.2 billion in 1987. In
2050 numbers of people who will be under this threshold of poverty international are likely to reach
1.9 billion. Furthermore, on the basis of recent trends, income inequality industrial countries and
those in the process of development will continue to grow.
In order to improve this situation it is important to study not so much the effect in itself, as
well as especially the causes leading to it, and these causes do not-and have the origin of the
theoretical part of globalization within the concept in itself, but in the manner of application, In
view of the fact that this phenomenon occurs at the macro level, and as a result, the decisions are
not taken by each individual in hand, but are taken from state. From among institutions whose

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powers shall enter promotion of globalization, two are the subject of several controversies: World
Bank and the International Monetary Fund.
Under the terms of this, currency World Bank: 'our dream is a world without poverty' seems
an irony. When financing from the World Bank brings in most cases, for very poor or in the process
of development, an increase in poverty in place economic growth, this institution tends to become
incredible. Thus, the outbreak crisis, the International Monetary Fund wrote solutions are becoming
obsolete, inadequate or in the best case, standard, without to take account of the effects it might
have on the population, and the results obtained were very weak. (Stiglitz, 2005)
Conclusion: no, the World Bank or International Monetary Fund does not work as it would be
highly desirable, whereas, either intentionally or negligently, make decisions which make almost
inapplicable globalization.
Taking into account the standard of living of some Third World countries, such as may be
required them to focus attention to ecology, for example? For someone who lives with less than 1 $
per day it is impossible to overcome their interest in quality or at the environment; essential for such
a person is to ensure that our lives and that was all. Therefore, the reality contrasts rather badly with
conceptually by globalization. Globalization, as is done now, it is not the idyllic and did not bring
general welfare.
In spite of these failures, it should not be ignored but positive effects of globalization, which
are of major importance. It is true that in the Third World countries the hinted that reported at the
beginning of the century, Living conditions have improved and for these countries, and the life
expectancy, for example, has increased as a result of progress in the health care sector got here
thanks to globalization. (Miron, 2002)
A positive element, the transformation of globalization is access to information. We live in a
world where progress includes in the definition to access to information. Globalization isn't perfect,
but its certainty’s brother.
Whereas the process of globalization has gained force its own, member become, objectively,
less powerful, less able to carry out their duties 'social' traditional, such as redistributing welfare and
protect the environment. What's more, they are becoming less capable of carrying out tasks
necessary capital international: ensuring the rights of property, ensuring social order, the fight
against crime, ensuring peace, etc. in the case of globalization, permeable boundaries are becoming,
more and more processes have, at present, A cross-border nature, and some I can't even be located.

III. ADVANTAGES OF GLOBALIZATION

Globalization is a chance for economic growth of poor countries and those with economies in
transition. As a result of globalization, developed countries export not only capital and jobs, but also
new technologies and labor standards higher. As a result, the phenomena of globalization and
integration involves from the Member States to a part of their sovereign attributes, one of the
fundamental norms international law. Reconsidering democratic principles, the right to private
property, the principles s rules of international law requires that a necessity. Thus, regardless of
changes to be made according to the trade, the basic principles of commercial policy will remain
still valid for a long time, with all technological progress what will be done.
In the market economy globalizes will remain valid principles to promote, support and protect
individual interests and/or group. Politicians focused his attention toward new world order-
economic, financial, military and eco-friendly. N believed there was both a vision optimistic on
globalization and a pessimism generated by political risks of the phenomenon. However, very few
people, groups or governments oppose globalization.
Active in the campaign against globalization are in particular ecology and some non-
governmental organizations, paradoxically even in the United States. For poor countries and with an
economy in transition, globalization becomes a chance, since foreign investors are attracted to
transfer capital in countries with labor cheaper. Globalization involves the risk that gambling to be
dominated by the economy. Political factor by tradition decision-making, territorial, shall be placed

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in the shadow of the power represented by the businessmen, financiers and bankers. It is necessary
to have an overall political framework for global economy, similar political framework created by
national state to the national economy. (Dinu, 2000)
The United Nations seeks to three decades, adopting a program aimed at reducing disparities
and combating poverty. The result efforts for three decades is not reduced, but deepening these
offsets. Politicians should focus on the ability of politics to act at national and international level, in
such a way that globalization does not mean only creation of markets, and therefore not to be
separated from the political and social. Contemporary evolution shows that the phenomenon of
globalization has to be built. In addition to regulations which facilitate global expansion markets
must be obtained political support for the achievement of the objectives remained behind - in
particular the social and environmental implications. (Bari, 2002)
Liberalism, as a driver of globalization, will deploy the mechanisms for an entire planet.
Globalization does not imply a convergence toward a liberal model of minimal state. On the other
hand, globalization, on the need of efficiency, is likely to mislead a consolidation of public
functions of the state. In 2007, the state can no longer work by manipulating and influencing public
undertakings. On the other hand, the state sets the rules of the game, and political forces shall have
the task of solving the problems which arise (economic crisis, poverty). For successful integration
in global system, the politician’s responsibility is difficult, to choose priorities in the economy. In
the new millennium the focus is on not on tradition and conservation national entity, but on
progressions and globalization. For this reason, the process of regional integration imposes
significant constraints of policies in the economic, financial and banking, commercial and social at
national level. Recovery politics autonomy has objective to meet its purpose politics - to represent
general interests and not narrow group interests. (Ignat, 1992)
Rule in this period of transition to global world is difficult; on the one hand, at the national
level governments have an obligation to strengthen the authority in order to ensure that Member to
ensure good citizens, And on the other hand states must realize the role that derives from dual
imperatives of globalization. There is a trend toward simplification proposals, in the global era, that
the state is to be considered an adversary, a real obstacle in the way of globalization. National State
remains, however, from a political point of view, the main way that makes it possible to exercise
democracy, if this is not the case, the citizens being reduced to a size of ordinary consumers.
Member-nation cannot evade their responsibility; within each country there is a need for a
strong state, in order to ensure that the governing citizens' protection. Civil society must find
balance between freedom private and public responsibility, between efficient markets and social
solidarity. Political factors are intended to assess realistic risks and find appropriate solutions. The
governing involves constitutional separation of powers, the rule of the law and the exercise of
power by executive, concerned ministries. Chance which he represents globalization must be
recovered. (Drăgan, Zaharia, 2000)
As a reaction to the global problems, many members opt for an association, and this is a way
to defend themselves against the negative effects of globalization. In the future enlarged European
Union, with a number of members almost double than that of today, cohesion Community actions
will be ensured through the establishment of a European Constitution, which have no knowledge
the European Treaties. The result would be a document uniform, affordable citizens and very
explicit. However, such a document would be fundamental solution for the purpose of establishing
Community rules of the game, in the areas in which is still present in doubt: relationships between
European institutions, delimitation of competences between the levels between EU and Community,
national, regional, local. Establish a clear competences result in increased transparency decisions
and to enhance their democratic legitimacy, so necessary to their acceptance extensive livestock
farming. Also, a document as well as the Charter of Fundamental Rights would legitimate in the
framework of a Constitution, which by its very nature shall establish the rights citizens - this time of
European citizens. (Stiglitz, 2012)
Taking into account the importance that can have such a document, the process of reflection
preparatory must involve the Member States and, equally, those which will have this status in the

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future. It would be a measure which would result in not only obtaining a general agreement on the
final text of the European Constitution, but would give and the legitimacy required in relation to
national Constitutions. Existence of a European Constitution is necessary to guarantee a thorough
integration into the European architecture, to building enlarged European Union. Also, this would
be the guarantee that in the new world order human rights and of the Member will not be able to be
breached.

IV. DISADVANTAGES OF GLOBALIZATION

Transition to a new stage of civilization presents contradictory consequences. It is a serious


worsening of existing gaps in the world today between rich countries and poor countries, in order
that the promotion new infrastructure, new technologies that characterize the postindustrial
company, involves enormous resources. Times, poor countries do not have these resources.
(Păltănea, 1994)
Careful analysis highlights negative effects of globalization, namely:
• destroy politics. "If the court rules policy has disappeared and self-contained in absorbing to
make it reappear economic state of war of all against all, competition and competition, economic
law becomes "ipso facto", The law of politics;
• destroy the state-nation and empty policy of substance, it must be huge threats to press to
environment, corrupt ethics and destroys crops;
• destroy ethics. Alleged ethics business ethics and market are "myths", whereas scam is a rule
exception and honesty. Every kick is used when the game is about money: dumping, price
manipulation, industrial espionage, use fiscal paradise, public offers of purchase, etc.
• destroy culture. Economic and imperialism economy which characterized modernity have
reduced crop to folklore.
The West replaced inside or culture by means of a mechanical that works to the exclusion and
not to integrate its members. Abstract integration of humanity in techno-cosmos by world market
and competition become generalized, decomposition social connection, despite myth "invisible
hand". This decomposition corresponds to social and political uncultured. In the absence of
recognition and a confer legitimacy necessary, culture relieves everywhere, distinguished two forms
of this reflux: the explosion was and increasing religious ascendancy of religiously tinted forms of
integration, with serious consequences in security-related matters, democracy and general
prosperity.
Globalization increases gap between the rich and the poor, social inequalities and
discrimination, are to be found even within advanced democratic societies.
Between negative aspects of globalization, there is evidence that impact, economic instability
caused by imports cheaper in industrialized countries in those lagging behind, under the conditions
liberalize the markets, financial mass rioting as a result of speculative activities, or massive staff
redundancies, Consequence of industrial corporate mergers. In fact, all these aspects are mirroring a
wrong way to develop or understand globalization, according to which this planet is a huge market,
within (i.e. from which they had gone any rules), Where the goods may be put into circulation and
can be changed, without any kind of hindrance, ignoring any social dimension, territorial or ethics.
(Robinson, 1991)
One thing is sure: the phenomenon of globalization will include gradually all countries,
regardless of their degree of development, whereas the technology of communication has a way
which does to him economic opportunities limited to partners. Technological globalization
promoters have as a rule resources required for such penetrations.
The phenomenon of globalization comprises three stages or levels, whose opening is carried
out in an order not at all accidental. (Stiglitz, Ocampo, Spiegel, 2006)
Globalization has changed technological economic theory classical, traditional, pointing out
that the production and trade is based in present increasingly on know-how, innovation, research

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and development, infrastructure and services for the communication and less on natural resources,
Industrial machinery and equipment.
Politic globalization reflect neo-liberals ideology hegemony in which triumphed over the
market economy and democratic domination Western model in internal decisions of a country and
the decisions between the countries. The victory of democracy had been facilitated by the
technological benefits of globalization, and which made marriage between information and
communication technology, the latter giving an incredible speed of release first.
Economic globalization reflects globalization and internationalization trade, production and
consumption. Electronic transactions, the transnational development and the formation of strategic
alliances countries boundaries more often met, and turnover figures of some economic entities
beyond the GDP of many countries.
Globalization is not aimed at conquest both countries, as well as that of the markets. Modern
concern such power is not conquest of territories, that during the time of the great security
outbreaks or in colonial periods, but treasures acquisition. This conquest is accompanied by
destruction impressive. Whole industries are lost brutally, in all regions, with social suffering those
results from: massive unemployment, underused employment, exclusion.

V. CONCLUSIONS

Words "new global consciousness" has started to be grown increasingly global


environments. From the global consciousness unique thinking imposed by a planetary moral
authority is no longer than a step. In the global vision, world unification under the umbrella of a
probationary authority shall mark worlds most advanced in history. But I see in the "political
unification forced in a universal state" the last step of the steady decline of civilization before final
collapse.
The process of globalization, a result of information revolution world, has a beneficial effect
on humanity; he leads to democratize international relations. We're not at the end of history, but we
are living in, in a concrete filled with history, and we are witnesses to the birth of global
civilization. For the first time in human history, individuals and peoples have the opportunity to be
free, to take destiny into their own hands. Explosion due to modern technology, boundaries, and
once with them, men's minds were opened. Human man can no longer be controlled, planned,
standardized by a central authority, be it good or bad. Information flows instantly in all the corners
of the world; in addition, the goods, services and capital move. (Michalet, 1985)
Globalization imposes special requirements for national economies. At macro-economic
level is necessary to a strategy able to ensure both occupational orientation toward economic
Macro-stabilization alone, as well as to give momentum of the modernization process of
technological and productive structure of the economy, Taking into account the requirements of the
potential upper national result, but the framing and efficiency of Romania in international division
of labor and in world competition.
Employers' associations consider decisive orientation must be facing rising from his chair
motion, spice level of competitiveness and of management. On the one hand, should be started on
the premise that on the world market may not penetrate and especially cannot maintain than
companies viable, powerful, and able to adapt to market requirements world and worldwide
competition.
Recent years have put the contrast in this requirement, resulting in a particular concern at the
level of enterprises, but also of the state. The reality shows that emphasize mergers which take place
between companies, is one of important features of the development throughout the world,
particularly in the developed countries; in these circumstances mergers will dominate the market
and the international capital in the next 10 years.
As it is known, the goods are produced under conditions very different from the point of
view of cost and productivity, of management, not only from an enterprise to another, but also from
one country to another. That goods offered on the world market, they join the competition with all

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similar goods, irrespective of their origin. World market and world economy appear to the
producers of those goods, including to their countries of origin, As a system, or reflecting system
and devote levels achieved in the world of labor productivity and costs and, ultimately, economic
proportions, especially between supply and demand, including additions and alternatives to national
production. In this way, the ability to create and to dispose of material wealth and nonmaterial is
determined not only for the efforts and how to use the resources to the national economy, But also
on the way in which they are estimated aces efforts and skills to produce and sell it into the world
economy, which has become global.

VI. REFERENCES

1. Bari I. (2002), Globalizare versus regionalizare, în "Dimensiunea istorică a


globalizării" , Editura Newa T.E.D., Bucureşti, pp.24-26
2. Dachin A. (coord) (2003), Evaluări ale dezvoltării durabile în România, Editura ASE,
Bucureşti, pp.57-59
3. Dinu M. (2000), Economie contemporană. Ce este globalizarea?, Editura Economică,
Bucureşti, p.47
4. Drăgan G., Zaharia R. (2000), Relaţii economice internaţionale, Editura ASE,
Bucureşti, pp.78-80
5. Gills B.K., James P. (2007), Globalization and Economy, Sage Publications, London,
p. 134
6. Ignat I. (1992), "Uniunea economică şi monetară", Editura Symson, Iaşi, p.67
7. Miron D. (2002), Economia integrării europene, Editura ASE, Bucureşti, p.93
8. Michalet C.A.(1985), Le capitalisme mondial, Presses Universitaires de France, Coll.
Economie en Liberte, 2e edition, Paris, p.14
9. Păltănea C. (1994), Restructurări în cadrul instituţional al economiei mondiale, Editura
Enciclopedică, Bucureşti, p.102
10. Robinson P. (1991), Globalization, Telecommunication and Trade, Futures Publishing,
London, pp.103-110
11. Stiglitz J.E., Ocampo J. A., Spiegel S. (2006), Stability with growth :
Macroeconomics, liberalization, and development, Editura Oxford University Press, Oxford,
p.109
12. Stiglitz J.E.(2012), The price of inequality, W. W. Norton & Company Publishing
House, New York, pp.52-59
13. Suciu M.C. (2002), Economia cunoaşterii şi civilizaţia globală: investiţia şi speranţa în
om, Editura ASE, Bucureşti, p.32
14. Taşnadi A., Doltu C. (1999), Fundamente în teoria ordinii economice, Editura ASE,
Bucureşti, p.78
15. Turner B.S., Khondker H.H. (2010), Globalization East and West, Editura Sage
Publications, London, pp.14-18

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of Economics and Issue 2(18),
Public Administration 2013

POWER-SHIFTS IN THE GLOBAL ECONOMY. TRANSITION


TOWARDS A MULTIPOLAR WORLD ORDER

Professor Ph.D. Ion IGNAT
“Alexandru Ioan Cuza” University of Iasi, Romania
ignation@uaic.ro

Ph. D. Student Gimia‐Virginia BUJANCĂ
“Alexandru Ioan Cuza” University of Iasi, Romania
gimia_2006@yahoo.com

Abstract:
The paper aims to analyze the new realities and trends related to the new polarity of the global economy, and
thus the reconfiguration of global power centers, a process characterized by two simultaneous trends: the rise of new
powers and the relative decline of traditional powers. At the beginning of 21st century, global power is suffering two
major changes: on the one hand it manifests a transition from West to East, from Atlantic to the Asia-Pacific, and on
the other hand, a diffusion from state to non-state actors. Current global economic power has a multipolar distribution,
shared between the United States, European Union, Japan and BRICs, with no balance of power between these poles,
opposed by the strong ambition of rising countries, China especially, China that rivals the traditional powers
represented by the developed countries. The evolution of the main macroeconomic indicators given by the most
important global organizations, shows a gradual transition towards a multipolar world. Therefore, the United States is
and will remain for a long period of time the global economic leader. However, as China, India and Brazil are growing
rapidly, and Russia is looking for lost status, the world is becoming multipolar.

Key words: BRIC countries, economic power centers, European Union, multipolarity, United States

JEL classification: F02, O57, O11

INTRODUCTION

The world of the early twenty-first century is a mixture of continuity and change. The
position of the great economic powers in the global hierarchy suffers changes, so that besides the
old power centers, new ones appear, willing to assert themselves and increasingly take part in more
global decisions, which leads to the shaping of a hybrid global economic order of a polycentric
system. Concerns about the global economy (as a global entity, which is becoming more
integrated), returned to the present after the economic crisis of 2007. Moreover, in the context of a
new architecture of power centers, correlated with structural and conceptual problems facing the
European Union, and the relative decline of United States economic power, the concern for
studying evolution of economic system has increased.
In this context, the choice of this theme is justified in terms of the importance and timeliness
of the topic. Thus, at the beginning of the XXI century, world states experiencing economic,
political, financial, demographic, geopolitical and geostrategic problems leading to profound
changes in the international system, will influenced and affect the global power equation in the
following decades. One of the most important changes in the multiplication of economic power
centers is the transition to a polycentric system - the rise of new centers of economic strength (in
2010 China became the world's second largest economy, surpassing Japan and is on the verge of
exceeding the U.S. in nominal terms, in the coming decades; India is strikingly manifesting as a
global player; Russia reappears as a significant global player; and Brazil is the power pole of the
South American Continent). Also apparent is an emphasis on competition between power centers
for regional or global domination, to which is added a configuration of new power groups with
marked impact on the dynamics of the economy and world politics (the BRICs). The global
financial and economic crisis started in 2007 represents key event in the evolution of great
economic powers, because due to it, the accumulation of big debts in most countries have
questioned the political supremacy of the European Union, which after 2008 faces a crisis of the
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Euro Area and its operating pattern. Another trend is represented by the manifestation of two
contradictory realities: on the one hand, the emphasis is placed on political and economic
integration, which means regionalization of the world economy, and on the other hand, the increase
of globalization makes the problems and solutions concerning different economic subsystems to
become rather global than national. According to some authors (Bonciu and Baicu, 2010; Minix and
Hawlez, 1998: 4), this overlapping of integrative and disintegrative forces determines major global
changes. It should be also noted the transfer of the economic, political and strategic center of
gravity from Atlantic to the Asia-Pacific, due to the rise of the Asian tigers, Japan and China.
To ensure an overview of this changing world, the article will follow to present the new
economic juncture from the beginning of 21st century. Thus, realities regarding the changes in the
world economy related to the following: diffusion and transition of power and the rise of new
economic growth poles versus the relative decline of the traditional powers. Also, the new role of
emerging powers in the international system, the monopole of the Asia-Pacific Area, the current
distribution of power and the future prospects regarding the place on the largest economic powers
hierarchy is analysed. A special emphasis will be put on the idea of dynamics and continuous
change in the relative position of countries and economic entities in the framework of hierarchies
that depend on the criteria by which they are established.
In 2013, it appears that the world economy is becoming increasingly interconnected (for
example the rising powers’ important contribution to the recovery from the effects of the financial
crisis), that the opportunities are equally many and more numerous than the challenges, that the
future prospects are extremely important, and the changes in the global economy dynamic are more
frequent and numerous.

EVOLUTION OF THE MAIN ECONOMIC POWER CENTERS

In the global economy, national economies are distinguished as the dominant economic
power centers. These are cores that concentrates the most important levers and means of decision.
Through the channel of interdependencies, they transmit in the economy of dependent partners
either spillover effects in the economic growth process (hence the name „economic growth poles”),
or adverse effects of spreading the imbalances, the phenomena of crisis and recession (Ignat and
Pralea, 2013: 46). Also, the centers of economic power are also the main forces who participate in
international trade, and give to world economy a polarized character, dominating either globally or
at the regional level.
The international economic system in the beginning of the XXI century is within a period of
transition and readjustment caused by significant changes in the early 90s, followed by the events of
11 September 2001, and finally the global financial and economic crisis of 2007-2008 whose effects
are still felt today.
Before the Second World War, there was a multipolar order in the which power was
concentrated in a few major centers: England, France, Germany, Italy, Japanthe U.S. and the USSR.
As can be seen in Figure 1, follows the US-USSR duopoly as a result of the Cold War. This
duopoly was defined by socio-political, ideological, economic and military power criteria. China’s
economic recovery (after 1965) made the transition towards a tripolar szstem defined by similar
criteria. Then, increasing the share of economic power and economic potential due to the the
technical and productive capacity in the balance of power, has made the economic recovery of
Western Europe, (has become the largest world market) and the "Japanese miracle" (that propelled
Japan as a global economic power), lead to reconfiguration the global economic system into a
pentagonal one (that dominated the economic literature of the '80s). There were 5 power centers at
that time: the United States, Western Europe, the USSR, China and Japan. The implosion of the
USSR and the communist regimes in the early 90s and the rise of S-E Asian countries (Brzezinski,
2006), gave birth to a multipolar economic system with 3 dominant global power centers - the U.S.,
EU and Japan, around which gravitated other 2 economic growth poles - China and India. Open
global economy has expanded and accelerated spectacularly since the first years of 3rd millennium

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and this expansion led to the next change in the nature of international economic order: the relative
decline (Nye, 2010) in the economic power of the U.S., EU and Japan and the accelerated economic
power growth of the emerging markets - Brazil, Russia, India and China - a group called BRIC or
BRICS (if it is included South Africa). In the 21st century, the national economic power is the one
that prevails, leaving in the background the military power (Gelb, 2010). Thus, there is a gradually
moving of international center of gravity from the developed countries to emerging economies, and
the BRICs countries constitute the leaders platoon.

Figure 1. The world’s largest economies by GDP (adjusted for PPP)


Source: Asia on the move – gravitational centre of the 21st century?, Allianz Global Investors Europe GmbH,
May 2012, p.5, Available at www.allianzglobalinvestors.de/capitalmarketanalysis

Future trends announce a change at the top of the hierarchy, estimating that the U.S.
economy will be overtaken by the Chinese economy in a shorter or longer time horizon. Although
many economists, including Joseph Nye Jr. (2012: 177), argue that the design of long-term trends
starting from the short-term events or based on fast growing power resources is a mistake (for
example the decades ago opinions about the loss of the first place held by the U.S. in favor of Japan,
given that the Japanese GDP per capita has surpassed the U.S. one); others interpret the global
financial and economic crisis as a proof of the decline of U.S. and therefore a balance power
transformation (Rachman, 2010); or as a foreshadowing of the global tectonic transformation
(Roche, 2008: 11). Moreover, the 2010 IMF report (World Economic Outlook, 2010) emphasizes
the idea that the crisis the power centers moved from developed countries to emerging ones.
Conversely, other studies support the primacy of the U.S. (Brooks and Wohlfort, 2008), but having
a more reduced domination (National Intelligence Council, 2012). Increasing importance is given to
BRIC countries, which is expected to exceed OECD countries production by 2030 (O'Neill, 2010;
Goldman Sachs, 2010). Also, these rising powers, require increasingly more global vision, but their
ability to effectively lead globally is limited because it does not provide yet sufficient global public
goods (Kappel, 2011) such as security, monetary arrangements, development aid, like the U.S., EU
and Japan. However, we observe a growing international importance of the G-20 (founded in 1999
as a result of the Asian financial crisis), which shows that important decisions can no longer be
taken into a limited circle, like that of the G-7 (later G-8) which brought together only the
developed countries.

PLACE OF MAJOR ECONOMIC POWERS IN THE GLOBAL HIERARCHY.


REALITIES AND PERSPECTIVES

The period from the beginning of the 21st century until today has brought numerous and
frequent changes in the hierarchy of the most powerful economies in the world, so that analyzing
the macroeconomic indicators provided by the IMF World Bank, OECD and CIA reports, we can
notice (Figure no. 2) that the U.S. have maintained the first position among the largest global
economies, while Japan, ranked second in 2001, was surpassed by China - a growing power pole in
the last 30 years. On the 6th position in 2001, China has surpassed France in 2005, Britain in 2006,

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Germany in 2007 and Japan in 2010, and became the second world economic power. It is also
observed along the period considered 2001-2013, a rise of emerging markets correlated with a
relative decline of developed countries. Thus, Brazil makes its appearance in the top 10 in 2005,
ranked 10th, Russia in 2008 ranked 8th, and India in 2010 ranked 10th.

Figure 2. Top 10 economic powers by nominal GDP in trillions of US dollars


Source: author’s presentation based on data from IMF and World Economic Outlook

Table 1. Comparative analysis of the main economic power centers of the world (2012 data)

Source: author’s presentation based on data from CIA World Factbook, https://www.cia.gov/library/publications/the-
world-factbook/

According to data presented in Table 1, the The United States continue to be the global
economic leader because their economic power is impressive: they have the highest GDP of $
15.684 trillion, a GDP per capita of $ 50,700, which ranks 14th in the world (from 229 countries),
the world share is 23% in 2000 (due to the effects of the 2007 financial and economic crisis), they
are the 3rd largest exporter after EU and China, with a volume of $ 1.564 trillion and the 2nd
importer in the world after EU, with a volume of $ 2.299 trillion. The U.S. hold the 19th position by
currency and gold reserves, which amounts to $ 150.2 billion. In addition, the U.S. are the world's
largest investor, with $ 4.507 billion, and also the States hold most stock of FDI at home, $ 2.732

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billion. American economy not only attracts a large part of the capital placed safely by other states,
but also a part of their "brains", given the GDP structure, where the services predominate with
79.7%, followed by the industry with 19.2 % and agriculture with only 1.1%, which is highly
mechanized and benefitting from a high level of technology. For a long time, the U.S. have
represented the financial center of the world, because the shareholders could find safe the American
markets, but the financial crisis of 2007-2008 severely affected this level of economy, which
subsequently led to the raise of London as the first financial center of the world. With the 4th global
workforce after China, India and the EU, the U.S. unemployment rate rose to 8.1% in 2012
decreasing compared to previous years. The budget deficit rose to 6.9% of the GDP, total public
debt became 72.5% of the GDP, with external debt totaling $ 15.93 billion. However, Niall
Ferguson (2010, p.3) says that an increase in public debt can not erode the U.S. force, but can
contribute to the weakening of trust in the U.S. ability to surpass any crisis. Inflation decreased
from 3.8% in 2008 to 2.1% in 2012, while the real GDP growth rate followed an ascending trend
from -0.3% in 2008 to 2.2% in 2012.
Considering European Union as the main structure of supranational integrationin the world
economy, its economic power is the closest of the U.S. one, taking into account the share in global
GNP. Total EU economy is slightly larger than the U.S., with a nominal GDP of $ 16.58 trillion and
a GDP (PPP) of $ 16.09 trillion, has a 3rd labor force globally; by exports and imports EU ranks
first in the world rankings being the first commercial power in the world. Besides that, EU is the
largest market of the world, but per capita income is lower than in the U.S. as a result of integration
of the poorest states in the East. One should not forget however, that the amounts that put the EU on
the leading places are just arithmetic gatherings of totals coming from the Member States, and this
makes sense as long as there is a consensus between its members. Basically, the EU economy is a
sum of national economies, which are still reluctant to full integration, that concerns and the
political side as well. Therefore, the EU often loses the competition with the U.S. economy, Japan
or China. Considered as a whole, the EU has the capacity, technology, financial resources and
population of a great power, but it lacks the consensus to follow this path. Despite the efforts like
the Lisbon 2010 strategy, the EU fails to regain its dynamism and competitiveness (minimized by
oversizing considered successful economic branches that have become nonperforming) and the
position it once had in the world economy (Moagăr-Poladian 2010). Also, the European
Commission (2013) estimates for 2013, shows that the EU economy is again in a phase of
stagnation after the recession of 2012, due to the decrease in private consumption and the decrease
in the real rate of productive investment. This stagnation is estimated to be followed by a moderate
recovery in 2014. Other problems facing the EU in recent years are the lack of effectiveness of the
socio-economic European pattern, the sovereign debt crisis, the relationship between public debt
and GDP of the Member States, but also between the budget deficit and the GDP (both of which are
at high levels).
In 2010, China overtakes Japan as world’s 2nd biggest economy. Therefore, Japan becoming
the 3rd largest economic power by the nominal GDP, which in 2012 amounted to $ 5.96 trillion,
while the GDP in PPP was $ 4.62 trillion, ranked 4th in the global economy. Despite losing its 2nd
place, Japan maintains its impressive power resources: with the GDP per capita, which is higher
than both of the emerging countries: $ 36.200 compared to $ 9.100 for China and $ 3.900 for India;
with its exports and imports according to which is ranked 5th and 6th (taking into consideration the
EU); with currency and gold reserves, which are on the worldwide 2nd place, by holding a highly
sophisticated industry, a highly skilled labor force and some areas where leads on technology and
production skills. The GDP growth rate of 2% in 2012 rose compared to the period after 2007, the
unemployment rate decreased to 4.4%, however, it is experiencing a high public and external debt
and needs urgent financial restructuring.
The BRIC Group is a dynamic pole of the world economy both for the present and
especially for the coming decades (Subacchi, 2008; Scholvin, 2010), demonstrated by an increase in
its share of world production from 16% to 22% between 2000-2008 through out the recession, much
better than the developed countries, and maintaine above average the economic growth rates

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(Kappel, 2010), in contrast to those of the developed countries. A common vulnerability of the
BRIC countries is the inflation rate, India being the most affected, while total public debt as
percentage of GDP is higher in India and Brazil. Also, by the flows of services in global trade, the
BRICs are set at a much lower value level than that of the flows of goods. In the period after the
recent global economic crisis, BRICs have the economic growth based not only on traditional
growth engines such as the exports and the FDI inflows, but especially on those additional engines
such as the domestic demand growth (stimulated by the high level of transfers from the abroad),
FDI outflows, innovation and infrastructure development. During the crisis, BRICs, and especially
China and Russia, have strengthened their position as global investors. Also BRICs did not turn to
austerity measures like the most developed countries, but to measures that boost the economy,
because before the crisis they were in a moment considered by experts as the "most prosperous" for
emerging economies (Quadros, 2008: 21).
China, the second largest economy in the world by GDP size, is a combination of factors
that make it unique: it has the largest population in the world (1.3 billion people); the highest
growth rate in the past years (about 10% in the first decade of 21st century, much higher than 3% of
the U.S. or EU 2%); is the largest producer of consumer goods in 2010 (surpassing the U.S. who
owned this position about 115 years); has the largest labor force (798.5 million); is the 2nd largest
petroleum consumer after the U.S. and the largest energy consumer in the world. It also has the
largest foreign currency reserve (the $ 3.341 billion) and in 2010 has climbed to 2nd place in the
hierarchy of the largest world economies, taking the place of Japan with a nominal GDP of $ 8.227
trillion and a GDP (PPP) of $ 12.405 trillion, attracting most of the FDI flows after the U.S.
Moreover, China is the 2nd largest exporter after EU and 3rd importer after the EU and the U.S..
However, the gap between China and other developed countries are seen in the GDP per capita
(Batson, 2010) of only $ 9.300, which ranks it at the 124th position, at a great distance from both
Japan, which surpassed it in terms of GDP nominal, and from Russia and Brazil. China quickly had
recovered after effects of economic crisis of 2007-2008, and Goldman Sachs (2010) and Jacques
Martin (2009) provide that the total size of the Chinese economy will surpass the U.S. in 2027.
China is still far behind the U.S. at the economic level, having to focus on internal development and
maintain high growth rates, which require a rise in investment and consumption. If the economy
would slow down and inflation would increase, the unemployment would also increase, thereby
fueling political tensions and threatening social stability. Probably in terms of total GDP, China will
reach and surpass the U.S. in the future, but its economy will be comparable to the U.S. just in
terms of size, but not in composition. China will face many problems like: the development gap
between regions and the integration of labor force from far away coastal provinces, an aging
population as a result of the policy "a couple, one child", and investment restriction. Also, the rates
of saving are higher and thus the demand is lower. China must face the lack of transparency in the
economy and must eliminate the corrupt and inefficient public enterprises.
India ranks 3rd in terms of population, holds the 2nd place in the labor force, is the 3rd
economy in the world by GDP at PPP of $ 4.68 trillion in 2012, the 10th economy by nominal GDP
($ 1.82 trillion) and the strong growth economic over the period 2001-2010 is especially due to the
development of services industry which contributes with 56.5% to GDP, and thus the expansion of
services has led to increasing their exports. Mostly, India remains a poor country with a per capita
income of only $ 3.900, the lowest of the major economic powers. During the last years it has
achieved an impressive annual growth rate peaking at 11% in 2010. Clearly, the Indian economy,
with its great educated and Anglophone middle class, is in the take-off phase. If China is the
"world's factory", India is the "world’s office" and generally offices offer more long-term stability
than factories, says David Smick (2009: 157). While the Chinese model depends on external
variables unpredictable and impossible to control entirely - exports and inflows of foreign direct
investment in technology, India benefits from an economy mostly supported by domestic demand,
albeit with capital inflows for shorter term. In addition, India operates under the rule of Anglo-
Saxon law, relatively constant, even if not perfect for foreign investors, but remains in sharp
contrast to the legal situation of China’s lacks of transparency, if not absent one. In the recent years,

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the Indian government has focused on the internal market characterized by a high absorption
capacity, determined by the the large number of population, expanding middle class, gradual
modernization of infrastructure, and remittances from Indian citizens abroad. Purchasing power is
eroded by inflation, in 2012 the inflation rate increased to 9.3%, being among the highest in the
emerging economies.
Russia is ranked the 8th largest economy by nominal GDP with $ 2.08 trillion, and the 5th
by GDP at PPP with $ 2.52 trillion in 2012. Also, it is ranked among the 5 largest reserves value;
has the high GDP per capita of the BRIC countries ($ 18,000); has the 8th global labor force; but
the economy depends significantly on petroleum and natural gas exports, thus after the total exports
Russia classifying on 8th place long before India and Brazil. Russia is characterized by the presence
of large disturbances in nominal and real economy (Dumitrescu, 2006), a mingling of the financial
capital with the state apparatus, barriers which limit FDIs, uneven development of regions and
corruption and tax avoidance, which overall affect the evolution of economic and social.
Brazil is the 6th largest economy by nominal GDP and 7th after GDP at PPP, per capita
income is $ 12.100, less than Russia, but 3 times larger than that of India, and also has the largest
currency reserves. The country is facing serious problems, such as inadequate infrastructure,
burdened legal system, corruption, high productivity growth is slow, poverty and inequality also
being present. During the economic crisis, the Government has focused on the internal market that
has a high absorption capacity. Robust domestic consumption was boosted by a low unemployment
rate of 5.5% and growing real wages, and it is considered one of the main engines of economic
growth over the past years, alongside agricultural exports (Brazil being an agricultural
superpower).

Figure 3. The evolution of real GDP growth (annual percent change) for the main economic
power centers of the world
Source: author’s presentation based on data from IMF, http://www.imf.org/external/datamapper/index.php

The first two things that are said about the U.S. economy nowadays are: first, the main
advantage is exactly the innovative capacity and entrepreneurial spirit of citizens, and the second is
that the American economy functions as a "barometer" for the world economy - entirely term crisis
confirmed by the economic crisis since 2007-2008. Thus, as illustrated in Figure 3, between 2007
and 2011, the year 2009 marks a negative trend, seeing a reduction in the rhythms of economic
growth in almost all countries, but especially in the developed ones. Russia and Brazil have quickly
passed over the episode of recession since 2009, while China and India have continued to register
high growth rates. However, 2012 marks a slowdown in GDP growth in all four emerging powers,
which demonstrates that these countries could not decouple from the global economy (Oehler-
Since, 2013: 13), but rather have been affected by the unfavorable economic situation from USA
and EU (especially the Euro Area). Moreover, China's economic slowdown negatively affected
Brazil, Russia and India, because it is the largest commercial partner for these countries after the
EU.

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Figure 4. Nominal GDP trend (Billions of U.S. dollars) and GDP based on PPP trend
(Billions of current international dollars) for the main economic power centers of the world
Source: author’s presentation based on data from IMF, http://www.imf.org/external/datamapper/index.php

As shown in Figure 4, the tendencies in the evolution of nominal GDP shows that the U.S.
will continue to maintain the first position among the globally most powerful national economies in
the next decade, and might even surpass the EU which is the largest world producer, with a GDP
less over the U.S.. On the other hand, it can be seen, according to the graphs above, that China's
rising is fulminat especially in terms of nominal GDP growth, which has registered an increase from
about $ 2 billion in 2000, to more than $ 8 billion in 2012, but also in terms of GDP at PPP, from
about $ 3,000 to $ 14.400 in 2012. In terms of GDP at PPP, IMF predicts an inversion of the first
two top positions, by overcoming the U.S. by the Chinese economy in the next 5 years, but not in
terms of nominal GDP in U.S. dollars. The linear projections of China's future economic growth
trends, until overtake the U.S., can be misleading, given the fact that countries that benefit from
imported technologies in the early stages of economic development maintain high growth rates
which are getting smaller by approaching to the higher stages of development determined by a GDP
per capita of more than $ 10.000.

Figure 5. Nominal GDP per capita trend (U.S. dollars per capita) and GDP based on PPP per
capita trend (Current international dollars per capita) for the main economic power centers
of the world
Source: author’s presentation based on data from IMF, http://www.imf.org/external/datamapper/index.php

Another important aspect in the evolution of growth rates for the major power centers is the
GDP per capita shown in Figure 5, which is clearly much higher in developed countries than in the
emerging rising powers, but for both categories of countries these rates are seen growing in the
analyzed period.

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Figure 6. The evolution of GDP (PPP) share for the main economic power centers of the world
Source: author’s presentation based on data from IMF, http://www.imf.org/external/datamapper/index.php

Economic balance of power between the top largest economies in the world, also can be
observed in the percentage contribution of each state to global gross product over time. Thus, as
illustrated in Figure 6, the European Union owns the first position with a share of about 20%, the
U.S. contributes with 19%, China with 15%, India with 5.6%, Japan with 5.5%, Russia with 3% and
Brazil with 2.8 %. Developments during the early 21st century, show a reduction in the share
percentage of the developed countries, together with an increase in the share of the emerging
powers led by China. IMF estimate a change at the top of this hierarchy, determined by China's
transition on the first place, before EU and USA, after 2017-2018. As a result of sustained growth
rates in the period before the economic crisis, the share of BRIC countries in the world gross
product expressed in PPP, has increased from 16% in 2000 to 22% in 2008. The production process
is no longer carried in the U.S., but in developing countries, transforming the U.S. into an economy
based on services. Asian manufacturing must be regarded, according to Fareed Zakaria (2009: 168)
and in the context of a global economy, like important links in the supply chain, but however, these
countries (like China) are only some links. Traditional power maintains the advantage over their
competitors through the education in science and technology, thus U.S. investment in research and
development are more consistent than in the EU, amounting to 2.8% of GDP, compared with 2% in
Europe (in Japan there are 3.4% of GDP).

CONCLUSIONS

The world becomes multipolar as a result of the increasing role of the emergent BRIC
countries, especially China’s role, and a continuous transfer of economic power from Atlantic to
Asia-Pacific. This is the new center of gravity of the world’s economy, represented especially by
APEC, which includes most of the major economies in the world (USA, China, Japan, Russia). On
the Asian continent, the center of gravity has moved, similarly, from Japan to China and India. The
rise of new poles power will change the global dominance of the largest OECD economies, and will
result toward a shift in competitiveness, global governance and international relations.
Moreover, the trend toward a multipolar world configuration is demonstrated by several
changes with an worldwide impact. Firstly, there is the transition from G7/G8 to G20 (which
includes developed and emerging countries) and also raising global importance of this Group as a
forum for discussing the issues with global impact. In the same context, one can see the increasing
share of the BRIC countries in the global economy, which have become the main source of
economic growth at the global level and therefore, a decisional factor in the Group G20.
In conclusion, the U.S. remain the most significant actor in the economic, technological and
military terms, the only global superpower, but its relative power will decrease in relation to the
new developments of BRIC countries, as emerging power poles. The emerging powers are no
longer spectators, but rather protagonists of the changing world order. However, it must not be
forgotten the fact that this shift must be accompanied by their commitment in order to be prove
effective.
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REFERENCES

1. Allianz Global Investors, (2012), Asia on the move – gravitational centre of the 21st
century?, Allianz Global Investors Europe GmbH, May 2012, available at
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2. Batson A., (2010), A second look at China’s GDP rank, The Wall Street Journal, Asia
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3. Bonciu F., Baicu, G., (2010), Economia mondială sub lupă: de la crize acute, la crize
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matters-more-than-force.
11. Ferguson N., (2010), Complexity and collapse, Foreign Affairs, 89(2), March-April
2010, available at http://www.foreignaffairs.com/articles/65987/niall-
ferguson/complexity-and-collapse.
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15. Jacques M., (2009), When China rules the world: the end of the western world and the
birth of a new global order, New York: Penguin.
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17. Kappel R., (2011), The decline of Europe and the US: shifts in the world economy and in
global politics, Hamburg: GIGA Working Paper, available at http://nbn-
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18. Lynam, J., (2009), G20 make or break, BBC news, 28 March 2009, available at
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de putere, Revista de Economie Mondială, 2(3), Institutului de Economie Mondială,
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22. Oehler-Şincai, I. M., (2013), Reconfigurarea modelelor de dezvoltare ale ţărilor brics
în contextul crizei financiare şi economice mondiale, Revista de Economie Mondială,
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32. World Economic Outlook, (2010), Recovery, Risk, and Rebancing, October 2010.

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of Economics and Issue 2(18),
Public Administration 2013

ANALYSIS OF THE FACTORS AFFECTING THE AVERAGE


LABOUR PRODUCTIVITY VARIATION IN AGRICULTURE,
FORESTRY AND FISHING IN ROMANIA
Lecturer PhD Carmen BOGHEAN
Ștefan cel Mare University of Suceava, Romania
carmenb@seap.usv.ro

Assistant PhD student Mihaela STATE
Ștefan cel Mare University of Suceava, Romania
mihaelas@seap.usv.ro

Abstract:
Productivity in agriculture most relevantly and concisely expresses the economic efficiency of using the factors
of production. Labour productivity is affected by a considerable number of variables (including the relationship system
and interdependence between factors), which differ in each economic sector and influence it, giving rise to a series of
technical, economic and organizational idiosyncrasies.
The purpose of this paper is to analyse the underlying factors of the average work productivity in agriculture,
forestry and fishing. The analysis will take into account the data concerning the economically active population and the
gross added value in agriculture, forestry and fishing in Romania during 2008-2011. The distribution of the average
work productivity per factors affecting it is conducted by means of the u-substitution method.

Key words: gross added value, economically active population, average labour productivity.

JEL classification: J24

1. INTRODUCTION

Rural development is of foremost concern, since 9.2 million people live in the townships
and villages of Romania, accounting for about 46% of the total settled population, according to the
final results issued by the National Institute of Statistics after the 2011 census of population and
dwellings.
More than 90% of the land fund in Romania consists of arable land, forests and areas
covered in woodland, waters and ponds, and thus agriculture, forestry and fishing activities are
crucial in natural resource extraction. An increased efficiency of the activities developed in these
sectors can lead to a visible alleviation of the effects of the economic crisis. The structural changes
in the organisation and development of these activities in farms throughout Romania are, however,
not very visible.
Resources can be grouped into four main categories: land, capital, labour and
entrepreneurship. Since land is a type of capital and as entrepreneurship is a result of human
activity, only capital and labour are the two major factors of production.
Labour is the active factor of production that influences all economic activities and thus
remains the main factor of welfare and development of any human community.
The identification of the sources of economic growth consists in measuring the volume of a
factor or in assessing the extent to which its efficiency may lead to increased productivity.
Economic growth generally results from an augmentation of these factors, from their amassment,
from the technical progress they incorporate and which is defined as the main catalyst of economic
growth. The volume and efficiency of the factors generally combine in variable proportions in order
to boost development.
Labour force in agriculture is one of the three fundamental resources (apart from arable land
and production equipment) that most decisively influence production output.
Many agrarian economists acknowledge the economic importance of agricultural activities

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by taking into account the high weighing of labour force costs in the structure of production costs.
This ratio is estimated to amount to 30-60% of the total costs, depending on the type of exploitation
or on the existing intensive or extensive production systems.

2. THE ROLE OF LABOUR PRODUCTIVITY IN RURAL DEVELOPMENT

Productivity establishes a qualitative relationship between production and the factors of


production employed. It can be most broadly defined as a relation between the output resulting from
the production process and the factor(s) used:
Productivity can be calculated either by taking into account all the production factors
(multifactor productivity) or just one factor of production (partial productivity). Multifactor
productivity stands for the aggregated efficiency of using all factors of production. Partial
productivity expresses the efficiency of using each factor of production separately (labour, capital)
and is measured for each economic sector.
As a consequence of the active and fundamental role of the labour factor for productivity, an
important part is played by labour productivity. This is why labour productivity is one of the
synthetic indicators of the economic activity developed in agriculture. Such an indicator measures
the effectiveness of labour costs in the production process, influencing the size of the productive
labour force and the ability of the labour force to produce an amount of goods or services in a given
amount of time.
The average labour productivity per economically active person is calculated as the ratio of
gross added value to the number of economically active individuals. The per-hour labour
productivity is measured as the ratio of gross added value to the number of working hours.
The factors influencing the size of productivity are as follows: natural (climate and fertility,
volume, structure and quality of natural resources); technical (scientific, technical and technological
progress); economic (organisation and management of the economic activities, employee training,
entrepreneurship, material incentives, etc); social (working and living conditions, the individual’s
economic freedom, legislation and law observance, etc); psychological (employee results and
behaviour, degree of adjustment to the working conditions and climate, etc); structural (changes in
the product structure or in the structure of the national economy, etc); integration of the national
economy in the international division of labour (types of technical and economic training, product
performance, etc.).
As Tofan Al. (2005) points out, the activity developed in agriculture is defined by a series of
particular features:
 It is influenced by natural conditions to a greater extent than other economic sectors,
which can eventually lead to greater variations of agricultural output each year;
 The results of the labour only become visible at the time of harvesting, which makes it
rather difficult to measure results at any time of the year;
 The agricultural output depends on the technology employed, on the skill of the
labourers as well as on the quality of the soil and the animals;
Agriculture is a paramount sector in Romania, both for its contribution to the national
economy and for its vital social role. Accounting for a 6.7% of the national gross added value in
2010, agriculture has always played an important part in the Romanian economy.
The weight of agriculture in the Gross Domestic Product of Romania has always been
considerable. However, the recorded weight has dropped in the past decade, but the fluctuations of
the agricultural output still cause significant variations of the GDP. Thus, if the weight of Romanian
agriculture in the GAV (gross added value of agriculture, forestry and fishing related to the total
gross added value) was of almost 12% at the beginning of the 2000’s, its evolution is now on a
descending slope, dropping to under 10% for the first time in 2005, and reaching the minimum
levels of 6.5% in 2007 and 6.7% in 2010 (Luca, L., Cionga, C., Giurcă, D., 2012).

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The Romanian agricultural and rural sector in Romania still has a considerable growth potential,
but one which is insufficiently exploited, as the restructuring of agriculture and the resuscitation of rural
economy are important levers in the economic development of Romania.
Romania exhibits significant differences from the EU-28 in terms of agricultural sector
productivity. The economic potential of agriculture and of the Romanian rural areas is poorly managed,
as shown by relevant data according to which, even during prolific agricultural years, the level of
productivity does not exceed 50% of the average EU-28, which is rather disappointing, given the
existing potential of this area. This state may be due to certain fundamental factors, such as:
- The internal structure of Romanian farms (small size, deep segmentation),
- Inappropriate or ill use of the factors of production (including human capital),
- Existing organisational framework and dysfunctional infrastructure,
- Particularly the lack of agricultural product marketing/capitalization infrastructure, which is
a critical aspect for small farmers.
In light of the above presented aspects, one can argue that the restructuring of agriculture will
have a major impact on rural economy as a whole, since agriculture is and will always be the most
important activity developed in rural areas as well as an essential source of income for households 
(Ministry of agriculture and rural development, 2012).
In terms of the labour force employed in agriculture, it can be defined as largely oversized as
compared to the EU standards, as the economically active population in rural areas and in the
agricultural sector remains at a constantly high level during 2007-2011 (National Institute of Statistics,
2012).
In 2012, the economically active population employed in agriculture and forestry accounted
for about 19% of the total economically active population in Romania, deviating rather highly from
the EU/27 average (4.7%) and even from the new member states (for instance, Poland: 10.1%;
Hungary: 5.5%; Bulgaria: 14.7%), not to mention countries like France (with 2.6%), the United
Kingdom (1.9%) or Germany (1.8%) (Luca, L., Cionga, C., Giurcă, D., 2012). The large number of
the population employed in agriculture and forestry activities is a first indicator of the low level of
labour productivity and hidden unemployment in this sector.
Apart from the structural aspects of the exploitation (low level) and of the human capital
(age, training), low productivity is also caused by the lack or reduced access to other factors of
production (equipment and capital).
The Romanian rural economy is currently mainly primary, the weight of agriculture
accounting for about 60% of its structure (as compared to about 14-15% in the EU), thus having
negative effects on the employment of the rural economically active population. Most farmers are
self-employed and maintain a form of subsistence agriculture, as they need to supplement their
income with additional earnings from non-agricultural activities.
All this information shows that the Romanian rural economy is still little integrated in the
market economy and that its restructuring is rather slow.

3. THE DYNAMICS OF THE MACROECONOMIC INDICATORS IN


AGRICULTURE, FORESTRY AND FISHING

The gross added value in agriculture, forestry and fishing in 2011 only accounted for
13.03% of the gross added value of the total national economy, rising from the previous year value
of 11.35%.
The dynamic analysis of the Gross added value indicator in agriculture, forestry and fishing
reveals a decreasing slope of this indicator during 2008-2010 and a come-back in 2011.

Table no.1 The gross added value in agriculture, forestry and fishing in Romania, during
2008-2011
YEARS TOTAL GROSS ADDED ABSOLUTE CHANGE EVOLUTION INDICATORS
GROSS VALUE (%)
ADDED Year 2008 Previous Year 2008 Previous

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VALUE (mil. % (mil. lei) year year


(MIL.LEI) lei) of total
2008 514700.04 34126.4 13.19 - - 100
2009 501139.37 32297.8 12.83 -1.828.60 -1828.60 96.7 96.7
2010 523693.30 29874.2 11.35 -4252.20 -2423.60 87.49 94.5
2011 556708.40 36438.6 13.03 2312.20 6564.40 106.71 112.4

Source: Authors’ own calculations, based on the Statistical Yearbook of Romania, NSI, Bucharest 2012

Romania is the country with the highest number of individuals employed in agriculture,
forestry and fishing in the European Union. The evolution of the population currently employed in
agriculture is rather opposed to the trend recorded in economically developed countries. Thus, there
are countries like the UK, the USA, Germany and Sweden that have about 3% of their economically
active population employed in agriculture, forestry and fishing. Moreover, the percentage of the
population employed in this sector is constantly decreasing.
Table 2 presents the dynamics of the population employed in agriculture, forestry and
fishing during 2008 - 2010.

Table no. 2. Population employed in agriculture, forestry and fishing in Romania, during
2008-2011.
YEARS TOTAL POPULATION ABSOLUTE EVOLUTION
EMPLOYED EMPLOYED IN CHANGE INDICATORS
POPULATION AGRICULTURE, (THOUSAND (%)
(THOUSAND FORESTRY AND INDIVIDUALS)
INDIVIDUALS) FISHING
(thousand % of total Year Previous Year Previous
individuals) 2008 year 2008 year
2008 9944 2767.8 27.83 - - 100 -
2009 9924 2764.2 27.85 -3.6 -3.60 99.87 99.87
2010 9965 2896.2 29.06 128.4 132.00 104.64 104.78
2011 9868 2612.5 26.47 -155.3 -283.70 94.39 90.20
Source: Authors’ own calculations, based on the Statistical Yearbook of Romania, NSI, Bucharest 2012

According to the data provided by the Household labour force survey in 2011, about 2612,5
people were employed in agriculture, forestry and fishing, decreasing by 155,3 individuals from the
year 2008.
The average labour productivity in the national economy in 2011 is rising, as compared to
the year 2008, but is still under the EU recorded average, according to the data provided by
Eurostat.
Table 3 presents the average labour productivity in agriculture, forestry and fishing in
relation to the value recorded in the national economy.

Table no.3 Average labour productivity in agriculture, forestry and fishing, as well as per
total of the national economy
Years Total Agriculture, forestry and Absolute change Evolution indicators
(Lei/ fishing (thousand individuals) (%)
employed (Lei/ % in year 2008 Previous Year Previous
person) employed relation to year 2008 year
person) total
average
2008 48958.0 12329.8 25.18 - - 100 -
2009 49120.9 11684.3 23.79 -645.50 -645.50 94.76 94.76

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2010 50938.4 10315.0 20.25 -2014.80 -1.369.30 83.66 88.28


2011 58250.9 13947.9 23.94 1618.10 3.632.90 113.12 135.22
Source: Authors’ own calculations, based on the Statistical Yearbook of Romania, NSI, Bucharest 2012

The average labour productivity in agriculture, forestry and fishing in 2011 was rising by
1618.1 lei/person employed as opposed to the year 2008. The average labour productivity in this
economic sector accounted for 23.94% of the average recorded for the national economy, lower
than the one recorded in 2008 when in accounted for 25.18%.

4. ANALYSIS PER FACTORS AFFECTING THE VARIATION OF LABOUR


PRODUCTIVITY

In order to draw thorough and strongly founded conclusions about the labour productivity in
agriculture, forestry and fishing, we must first conduct the analysis per factor affecting labour
productivity.
The role of this analysis per factor of influence explains the changes affecting this indicator
in 2010, as opposed to the previous year, in order to identify the internal reserves that can
subsequently cause this indicator to increase in the future.
The model employed in the factorial analysis of labour productivity is based on the
mathematical formula used to calculate this indicator, which practically allows one to explain the
variation of the economic efficiency of the labour factor in terms of the influence of the specific
factors of such an efficiency correlation: gross added value – expressing the useful economic effect
and the employed population and number of working hours, respectively, for the population
employed in agriculture as a reflection of the human effort put into achieving this effect.
The formula for calculating the average labour productivity is:

where:
VAB- gross added value in agriculture, forestry and fishing
PO-population employed in agriculture, forestry and fishing

The average labour productivity is directly proportional to the gross added value and
inversely proportional to the number of employed individuals.

The analysis per factors affecting labour productivity is conducted based on the substitution
method or the iterative method that entails the following stages:

 Identifying the total change of the average labour productivity

 Identifying the influence of the change in the gross added value

 Identifying the influence of the change in the employed population

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The analysis of the change in the labour productivity per factors affecting it underlines the
fact that both factors have had a positive influence, thus leading to the increase of the average
labour productivity in agriculture, forestry and fishing by 3632.9 lei/employed person
The increase recorded by the gross added value indicator in agriculture, forestry and fishing
by 6564.3mil. lei in 2011 as opposed to 2010, would have led to an increase in the average labour
productivity by only 2266.52 lei/person if the number of the population employed in this sector had
remained the same. The weight of the increase of this factor in the global increase of the average
labour productivity in agriculture, forestry and fishing is of 62.39%
The change in the number of the population employed in agriculture, forestry and fishing, by
the decrease of 283.7 thousand people in 2011, as compared to 2010, has triggered an increase in
the average labour productivity by 1366.38 lei/person. The weight of this factor in the global
increase of the average labour productivity is of 37.61% of the total recorded growth.
Based on the data analysed above and as a consequence of the research conducted on labour
productivity in agriculture on a European level, we shall see that labour productivity in Romania is
much lower that the one recorded in the European Union. Among the causes of this disparity, we
can mention: much lower technical endowment in Romanian agriculture, lower work motivation,
lower professional training levels, higher ration of women and more advanced age of Romanian
agriculture workers, a generally lower level of Romanian exploitation in agriculture as compared to
the EU level and especially the excessive allotment of the arable land, as well as the poorer quality
of the biological material used in Romanian agriculture and outdated production technologies.
The choice for a higher productive agriculture not only brings about advantages, but also
certain drawbacks, the latter consisting in the limitation of labour productivity. Depending on their
nature, these limitations derive either from the specific production processes in agriculture or from
the labour productivity mechanism itself.

5. CONCLUSIONS

Romania used to be the most important agricultural producer in Central and Eastern Europe,
but, in the past few years, imports account for a significant part of the agricultural produce needed
for consumption.
Even though agriculture, forestry and fishing account for 13.03% of the gross added value in
the national economy and encompass 26.47% of the economically active population, the actual
performance of this branch is far from the soil and climate potential of the country and far from the
experience accumulated by the Romanian people in this sector throughout centuries. The low level
of the average labour productivity in this economic sector shows that there is a waste of labour
force in Romania. This may be mainly due to the presence of a significant surplus of individuals
especially in those highly agricultural areas. If the developed countries of the EU have reduced the
number of people employed in agriculture during several decades and have even managed to lower
it below the necessary, thus determining them to resort to immigrants during specific times of the
year, the opposite is true for Romania, where, during the past decade, we have had an atypical
movement of the labour force from non/agricultural sectors towards agriculture (mainly due to the
massive lay-offs from other non/agricultural activities and early retirements), when an exceeding
number of individuals were already employed in agriculture. Therefore, the marginal productivity
of these individuals amounted almost to zero. Secondly, the size of most agricultural exploitations
does not meet the necessary economic and physical standards to ensure the full use of the labour
force and the related revenues.
The success of any rural development policy, and particularly in the case of Romania,
consists in diversifying the rural economy and in developing and promoting alternative economic
activities. This objective is closely related to the education and training level of the labour force.

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The transfer of the labour force from non-agricultural to agriculture related activities calls for a
reassessment of the training, qualifications and skills, as well as of the lifelong training needs. The
creation and development of new economic activities in the form of new exploitations, new
enterprises or new investments in activities unrelated to agriculture are essential measures for the
development and competitiveness of the Romanian rural areas.
Even though it hasn’t benefited from much attention lately, labour productivity is an
important indicator of economic activity efficiency. The past few years have been rather significant
in this respect, since greater attention has been given to the resizing of the agrarian policies and to
the adjustment of one of the main boosters of labour productivity in the agriculture of developed
countries.

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4. Vâlceanu, Gh., Robu, V., Georgescu, N. (2005) Analiză economico-financiară,
Economica,Bucharest;
5. Tofan, Al. (2004) Productivitatea muncii în agricultură, Scientific Annals of the
University “Alexandru Ioan Cuza” of Iasi, Economic Sciences;
6. ***(2013) Agriculture, forestry and fishery statistics, Eurostat,
http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-FK-13-001/EN/KS-FK-13-001-EN.PDF;
7. *** (2012) Anuarul Statistic al României, National Institute of Statistics, Bucharest;
8. ***(2012) Forţa de muncă în România: ocupare şi somaj (2003-2011), National
Institute of Statistics;
9. ***(2010) Productivitatea muncii în agricultură, Romanian Statistics Journal nr. 4 /
2010 http://www.revistadestatistica.ro/Articole/2010/A3_ro_4_2010.pdf;
10. ***(2013) Recensământul populaţiei şi al locuinţelor din 20-31 octombrie 2011
http://www.recensamantromania.ro/wp-content/uploads/2013/07/REZULTATE-DEFINITIVE-
RPL_2011.pdf;
11. ***(2012) Raport anual de progrese privind implementarea Programului Naţional de
Dezvoltare Rurală în România în anul 2011, Ministry of agriculture and rural development,
http://old.madr.ro/pages/dezvoltare_rurala/Raport_anual_PNDR-2011.pdf.
 

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The USV Annals Volume 13,
of Economics and Issue 2(18),
Public Administration 2013

EMPIRICAL REFLECTIONS ON MIGRATION


PHENOMENON. MAJOR EFFECTS OF MIGRATION ON THE
HUMAN CAPITAL
Lecturer PhD Simona BUTA
Ștefan cel Mare University of Suceava, Romania
simonab@seap.usv.ro

Associate Professor PhD Rozalia Iuliana KICSI
Ștefan cel Mare University of Suceava, Romania
rozaliak@seap.usv.ro

Abstract:
The paper Empirical reflections on migration phenomenon. Major effects of migration on the human
capital analyzes the migration flows of the workforce (as part of the human capital) globally/regionally, especially the
highly qualified workforce migration. The qualified manpower processes of attracting on the work market have not
been always well understood and, in some cases, have generated a series of difficulties. This is the reason why we will
focus on the „waste of brains” phenomenon, which appears when highly qualified individuals are neither employed in
the source-country nor in the target country; and, if they are, their job is below their qualifications.

Key words: migration, migrants’ productivity, remittances, brain-drain, human capital

JEL classification: O15, R23

1. INTRODUCTION

Migration is a phenomenon which affects the formation and accumulation of human capital,
especially the migration of highly qualified workforce from poor countries to the developed ones. It
affects the process of human capital formation, in several ways:
- The brain-drain has a negative effect and depends on the „brains” share of the migrants
total; still, in this case, we can talk about an „optimal brain drain”, which manifests itself when
education is seen as a „passport” towards emigration; thus, the emigration possibility stimulates the
students from the source-country, to follow academic studies; therefore, the brain-drain may be
thought of as a strategy which follows the education and „export” of highly qualified workers in
order to attract economic benefits [Vodă I., Domnite L., 2007];
- The increase of migrants’ productivity, migrants who came back based on their experience
abroad; in this case, the migrant is an agent of technologies international transfer and depends on
the probability of his coming back to the country (in this case, we talk about „brain movement”);
- The use of remittances as a source of study funding (especially higher education studies);
it depends on the country’s education system quality (since education, for which the remittances are
spent, do not offer relevant knowledge, the final effect upon the productive human capital is
negligibly smaller).

2. SHORT ANALYSIS OF THE MIGRATIONAL PHENOMENON

Without a doubt, the increase of the highly qualified workforce migration is one of the main
characteristics of international migration, especially in developed countries; thus, a lot of these
countries have adopted measures in order to facilitate recruiting of highly qualified workforce (for
example, granting of fiscal incentives, a.o.). This tendency will manifest itself also in the future, as
a result of the current demographic changes.
Currently, the immigrants stock is of 215,8 million people or 3,2% of the population;
women, as percent of the immigrants, represent 48,4% [World Bank, UNDP, 2011]. The main
„receptor” - countries („host”), globally, for the emigrants are: USA, The Russian Federation,

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The USV Annals of Economics and Public Administration Volume 13, Issue 2(18), 2013

Germany, Saudi Arabia, Canada, Great Britain, Spain, France, Australia, India (see table no 1.1)
while the „source” ones (which the population migrate from) are: Mexico, India, The Russian
Federation, China, Ukraine, Bangladesh, Pakistan, Great Britain, The Philippines, Turkey (see table
1.1).

Table no 1.1
The top of countries in/from which people emigrate,
(no of immigrants, millions)
NO OF
NO OF EMIGRANTS
RECEIVER COUNTRIES IMMIGRANTS IN „SOURCE” COUNTRIES
IN 2010
2010
USA 42,8 MEXICO 11,9
RUSSIAN FEDERATION 12,3 INDIA 11,4
GERMANY 10,8 THE RUSSIAN
FEDERATION 11,1
SAUDI ARABIA 7,3 CHINA 8,3
CANADA 7,2 UKRAINE 6,6
GREAT BRITAIN 7 BANGLADESH 5,4
SPAIN 6,9 PAKISTAN 4,7
FRANCE 6,7 GREAT BRITAIN 4,7
AUSTRALIA 5,5 THE PHILIPPINES 4,3
INDIA 5,4 TURKEY 4,3
UKRAINE 5,3 EGYPT 3,7
ITALY 4,5 KAZAKHSTAN 3,7
PAKISTAN 4,2 GERMANY 3,5
THE I.E. 3,3 ITALY 3,5
KAZAKHSTAN 3,1 POLAND 3,1
JORDAN 3 MOROCCO 3
ISRAEL 2,9 GAZA 3
HONG KONG 2,7 ROMANIA 2,8
THE IVORY COAST 2,4 INDONESIA 2,5
MALAYSIA 2,4 USA 2,4
SYRIA 2,2 AFGHANISTAN 2,3
JAPAN 2,2 PORTUGAL 2,2
IRAN 2,1 VIETNAM 2,2
KUWAIT 2,1 COLOMBIA 2,1
SINGAPORE 2 KOREA 2,1
SOUTH AFRICA 1,9 UZBEKISTAN 2
GHANA 1,9 SRI LANKA 1,8
SWITZERLAND 1,8 BELARUS 1,8
THE NETHERLANDS 1,8 FRANCE 1,7
Source: Migration and Remittances, Fact book, 2011; Development Prospects Group, World Bank; UNDO 2009

As for the migrants’ training level, there is a total of 46,8 millions of low qualification level
migrants (43.6%), 37.5 millions of medium qualification level migrants (35%) and 23 million
highly qualified migrants (21.5%) (Dumont, J.C., Spielvogel G., Widmaier S., 2010). The great
percent of 43.6% from the total, that is 46.8 million migrants, is explained in that the majority of the
„receptor” countries hire medium or low qualified workers for „3Ds” type of professions (an
exception being Japan) (1). Noticeable is the fact that the low qualification population’s migration
still prevails, in absolute terms; the low level of qualification of people who migrate is maintained
both in the OECD member-countries, as in the non-member ones. At EU level, as one may notice in
the figure 1, the same phenomenon is registered; the immigrants with ages between 25 and 54 years

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The USV Annals of Economics and Public Administration Volume 13, Issue 2(18), 2013

have a lower level of education compared to the autochthonous population. In the European Union,
the higher educated immigrants tend to be sub-represented (1% difference) and overly-represented
to a greater extent by those with a lower level of education (12% difference).
100%

90%

80% High
70%
Medium
60%

50% Low
40%

30%

20%

10

0%
Men Women Men Women Men Women Men Women

Autochthon. Foreign origins Autochthon. non-eu

Source: Eurostat, EU Labor Force Survey, Demography Report, 2010


Figure 1. Educational level of the population with ages between 25-54 years, depending on the
country of origin, 2009 (%)

Still, the emigration rate of highly qualified people exceeds the total rate of emigration in all
regions, something which reflects the migration’s selective character. Also, one can notice that the
emigration rate of people with higher education in Africa has reached, globally, the value of 10.6%
(9.7% for the migration towards the OECD countries), while the global average is of 5.4% (4.3% in
the OECD countries) (Dumont, J.C., Spielvogel G., Widmaier S., 2010) (the emigration rates per
regions and categories will be analyzed later). In the EU, the share of higher educated immigrants
and of those with lower education differ significantly within the member-states; the EU states do
not seem to attract a great number of higher education immigrants, even if the share of highly
educated immigrants is of more than 40% in some countries (Ireland, Bulgaria, Luxembourg,
Estonia and Poland). Some countries have the tendency to attract low –educated immigrants,
especially in Greece, Portugal, Malta, Italy, Spain and France, a case in which over 40% of the
immigrants have a lower level of education (see table 2, we have previously spoke about the „3Ds”
concepts) (European Commission, 2010).
Obviously, the process of attracting qualified immigrants on the labor force market has never been
so well understood, and in some cases, has generated a series of difficulties. As one observed within
the autochthonous population, immigrants (considered as people born abroad) with a higher
education have managed to get on the host-country labor market easier than those with a lower
education. Generally speaking, this is the case of the OECD member-countries, but in the other
countries, the situation varies considerably. The discrepancies related to the labor force occupying
rate and unemployment between the autochthonous population and immigrants tend to increase
once with the education level. Thus, the structure of immigrants, on education levels, varies from
one „host” country from another. As one can see in table 2, immigrants with higher education but
also lower education studies, tend to become an important share, reaching a total of 46.8%.

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The USV Annals of Economics and Public Administration Volume 13, Issue 2(18), 2013

Table 2

Educational level of people with ages between 25-54 years, depending on the country of origin,
2009 (%)
Countries Autochthonous Foreign population EU 27 autochthonous Non-EU
population population
L M H L M H L M H L M H
EU 27 23 49 27 35 38 26 26 45 29 39 36 25
Belgium 22 41 37 38 30 32 30 32 38 44 29 27
Bulgaria 19 57 24 * (51) (45) (54) (41)
Czech 7 77 17 14 62 24 14 63 23 14 61 25
Republic
Denmark 20 42 37 28 37 35 13 37 51 32 37 31
Germany 9 63 28 * * * * * * * * *
Estonia 10 53 36 (4) 55 42 (47) (52) (4) 55 41
Ireland 25 38 37 16 34 50 19 37 44 10 26 64
Greece 31 43 27 49 37 14 28 52 20 54 33 13
Spain 44 21 35 43 34 23 30 39 31 48 32 20
France 22 45 32 41 31 28 39 34 28 41 30 29
Italy 40 43 16 43 44 12 31 57 12 50 38 13
Cyprus 20 42 38 25 38 37 16 45 39 32 33 35
Lithuania 13 60 28 7 68 25 (16) 61 23 6 68 26
Latvia 7 60 33 * 63 34 * * * * 63 35
Luxembour 18 53 29 25 30 45 25 30 46 24 34 41
g
Unary 17 62 21 13 55 32 13 59 27 (11) 44 45
Malta 68 17 15 53 (27) (20) (50) * * 55 28
Holland 21 44 35 37 34 29 21 34 45 41 34 25
Austria 12 68 20 30 50 20 10 58 32 40 46 14
Poland 9 67 24 * 56 41 (59) (40)
Portugal 68 16 16 49 30 21 40 31 29 51 29 19
Romania 21 65 14 * * * * * * * * *
Slovenia 12 61 27 32 57 11 * 64 (32) 35 56 9
Slovakia 7 76 17 * 68 23 * 68 22 68
Finland 12 47 41 25 45 30 18 52 29 29 40 31
Sweden 12 53 35 29 36 36 19 39 42 32 35 34
Great 24 41 35 20 44 36 15 53 32 21 41 38
Britain
Norway** 13 56 31 17 47 36 * * * * * *
USA** 8 52 40 30 35 35 * * * * * *
Canada** 23 38 39 22 32 46 * * * * * *
(L-Low, M-Medium, H-High)
The number within the parentheses emphasizes the lack of reliability, due to the reduced dimension of the sample;
"*" indicate whether there are no available data
** The data has been taken over from International Migration Outlook, OECD
Source: Eurostat, EU Labor Force Survey, Demography Report, 2010

Except the south European countries (Portugal, Spain, Greece), Luxembourg and Hungary,
where immigration is a recent phenomenon, the immigrants’ employment rate is smaller than that of
the autochthonous population from all other countries. The education level explains these
differences only partially; exceptions to the rule are Austria and United States of America. In
France, for example, even though the immigrants’ educational level can be compared with that of
the native people, a gap of over 60% in the workforce occupation rate is maintained (see figure 2);
in Ireland the gap is even bigger. In Denmark, Germany and Finland, the gap exceeds 15%. As for
the unemployment rate, the analysis performed by OECD confirms the same differences between
natives and immigrants.

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The USV Annals of Economics and Public Administration Volume 13, Issue 2(18), 2013

Difference between the population’s occupation range from the receiving country and that of
the immigrants (%)
Difference between the immigrants" occupation efective range, and the desired one, if the
immigrants have the same education level as the native/originary population (%)

25

20

15

10

-5

-10

PL DK NL SE BE FI GB DE NO NZ FR CN CZ AU SI AT CAIE USA PT HU ES GR IT LU

(PL– POLAND, DK – DENMARK, SE- SWEDEN, FI – FINLAND, GB- GREAT BRITAIN, DE-GERMANY, NO-
NORWAY, NZ- NEW ZEALAND, FR-FRANCE, CN- CHINA, CZ- CZECH REPUBLIC, AU-AUSTRALIA, SL-
SLOVAKIA, AT- AUSTRIA, CA- CANADA, EI-IRELAND, PT-PORTUGAL, HU-HUNGARY, SP-SPAIN, GR-
GREECE, IT-ITALY, LU-LUXEMBOURG)
Source: ***International Migration Outlook, OECD, 2007
Figure 2. Differences in the share of occupation for the native population and immigrants

Also, from the graphic 1.2 one may see that in France, the difference between the
locals/local population occupying share is of 7,3%. In the case where an immigrant has followed the
same education structure as the locals, the employment rate is by 2,3 % higher. In other words, 5%,
that is more than two thirds from the difference, which cannot be explained directly by the
differences given by qualification/training.

3. CONCLUSIONS

As a consequence, we can say that the immigrants deal with difficulties when it comes to
using their knowledge on the labor market; we are talking about a brain drain phenomenon which
appears when highly qualified individuals are neither employed in their source country, nor in the
target country; and, if they are, their jobs is below their qualifications.
These difficulties can be attributed to: 2) the differences given by „value" of
studies/diplomas or the intrinsic competences; (b) problems related to the acknowledgment of
diplomas obtained in the country of origin; (c) lack of human and social capital specific to the host-
country (for example, linguistic abilities/language knowledge); (d) workforce market local
situation; and (e) the various forms of discrimination. Difficulties in the access of labor force on the
market can also appear in case of „over-qualification”. This phenomenon appears when a person
holds a job which needs lower qualifications and has a smaller remuneration than it would
theoretically be accessible to people who have the same education level.
Also, we can talk about multiple influences upon the migrational flows of the workforce (as
part of the human) globally/regionally:
- There are several global „tendencies” between the „poor” and the rich countries;
- There are numerous differences and disparities, aspects which are strictly specific per
countries’ main groups (Western countries, such as USA, Canada etc.; Asian countries or recently
industrialized; Japan’s unique case; the African countries etc.);

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The USV Annals of Economics and Public Administration Volume 13, Issue 2(18), 2013

- Along with economic or financial aspects, the labor force emigration phenomenon or
pattern is strongly „imprinted” by the historical and cultural relations between several countries of
the world;
- Religious, ethnicity conflicts, or the wars occurring from these types of causes strongly
distort the population’s migrational flows.

ENDNOTES
(1) The 3Ds” Concept – Dirty, Dangerous and Demeaning, frequently met as Dirty, Dangerous and
Demanding or Dirty, Dangerous and Difficult comes from the Japanese 3K expression: kitanai, kiken, and kitsui (J
Connell, 1993).It is a concept used on large scale, especially as to work performed by the immigrant workers. Normally,
workers who perform 3D type of activities should be well paid, due to: the undesirable of these occupations and
necessities of attracting workers who would perform such works. Still, these jobs are not well paid due to a cumulation
of factors, respectively: the existence of a significant number of workers which find it impossible to attract other types
of jobs and the existence of a high unemployment or of a stagnant poverty which leads to the migration of the
workforce.
Also, the evolution on a larger scale of the workforce international migration from the developing countries towards
developed states, ever since the 19th Century and beginning of the 20th, has ensured an important stock of immigrants
which wish to perform „3D” types of works, with lower wages than the native inhabitants. Developed countries’ big
wages are a strong „pull" factor in the international migration; thus, a worker who emigrates from a developing country
accepts a smaller wage for a 3D job in a developed country, in the conditions that this might mean a significant increase
of wages compared to the country of origin. The examples which attest this phenomenon include the indians and the
Pakistani who emigrate in the Middle East to work in the constructions industry; in USA, the „3D” occupations
performed in the past by Irish and German immigrants are currently held by latino-americans. As the name itself
indicates–a dirty, dangerous and demanding work – such jobs have a series of serious consequences (both physical and
pshychological) upon workers. Many times, there is a risk of early retirement because of a work accident, exhaustion, or
mental fatigue.

REFERENCES

Periodicals:
1. ***Development Prospects Group, (2009), World Bank, UNDP
2. ***European Commission, , (2010), Demography Report, Eurostat, EU Labour Force Survey
3. ***EU Labour Force Survey, (2010), Demography Report, Eurostat
4. ***International Migration Outlook, ,( 2007), OECD
5. ***Migration and Remittances, ,(2011), Factbook
6. *** Migration and Remittances, Factbook, (2011), Development Prospects Group, World Bank,
UNDP

Books:
1. Vodă I., Domnite L. (2007), Efectele migraţiei asupra stocului de capital uman” în Popescu C.,
Pohoaţă I., Capital uman, capital social şi creştere economică, Editura Universităţii „Al. I. Cuza”,
Iaşi

Working papers:
1. Dumont, J.C., Spielvogel G. (2010), Widmaier S., International migrants in developed,
emerging and developing countries: an extended profile, OECD Social, Employment and Migration
Papers, No. 114
2. Connell J, Kitanai, (1993), Kitsui and Kiken: The Rise of Labour Migration to Japan, Economic
& Regional Restructuring Research Unit, University of Sydney

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The USV Annals Volume 13,
of Economics and Issue 2(18),
Public Administration 2013

THE PLACE OF E.U. TOURISM WITHIN THE FRAME OF WOLRD


TOURISM
Assistant Ph.D. Adrian Liviu SCUTARIU
“Ştefan cel Mare” University of Suceava, Romania, Faculty of Economics and Public Administration
livius@seap.usv.ro

Abstract:
This article presents the evolution of the global tourism, highlighting the shares of the five major regions of the
world: Africa, Middle East, America, Asia-Pacific and Europe. Over the last decades there has been registered a
significant increase in tourism worldwide, but the rates of growth vary from one destination to another. The countries
of the European continent still maintain their position among the most important tourist destinations of the world,
which brings them consistent income from international tourism; the EU continues to have a significant share in world
tourism, even if the states of Asia and the Pacific have attracted more and more tourists in the last years.

Key words: tourism, arrivals, receipts, E.U., tourist destinations, growth rates

JEL classification: L83

THE EVOLUTION OF TOURISM AT WORLD LEVEL IN THE LAST DECADES

In the last six decades tourism has made significant progress, turning into a major economic
and social phenomenon. At the same time, along with the traditional destinations - Europe and
North America -, the new tourist destinations from other areas begin to attract more and more
tourists. We can notice that the total number of international tourist arrivals increased from 25.3
million in 1950, to over 940 million in 2010, which means an increase of about 37 times (Figure no.
1). This tremendous growth is mainly due to the technical progress, people’s higher income and
more spare time allocated for tourist trips. It should also be added that one of the factors which
contributed to the recording of the ascent evolution of tourism was its multifaceted approach, in the
sense that, in time, more and more trips were comprised in the category of tourism (business trips,
for instance). This accounts for the manner of including tourists in statistics, which made these data
become more and more comprehensive. It is true that the above-mentioned issues do not have a
major impact on the tourist statistics and do not question the high level of tourism development over
the last decades.

Figure no. 1. The evolution of number of international tourist arrivals between 1950-2010 and
forecasts
Source: UNWTO Tourism Highlights, 2013 Edition, World Tourism Organization (UNWTO), p.14

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The USV Annals of Economics and Public Administration Volume 13, Issue 2(18), 2013

From figure no. 1 it can be noticed that, in the second half of the 20th century, all the five
major regions of the world scored notable increase, but the growth rates were different. More than
half of the international tourist flows are directed towards Europe, followed by Asia and the Pacific
with around 20% of total arrivals and by America with approximately 16%.
In recent years, tourism has known a positive trend, despite some circumstantial decreases
(caused by phenomena such as crises, regional conflicts or political instability). Such decreases
could be seen in the total number of arrivals in 2003 and 2009. All in all, it can be noticed that the
number of tourists who travel abroad continue to go up, the figures in 2010 being approximately
twice as big as those in 1990.
Regarding the growth rate of tourism activity, it had an average of 6.79% between 1950 and
2010, being higher at the beginning, and moderate in the last years. Considering the areas, the
highest increases occurred in Asia and the Pacific (12.93%), as well as in the Middle East (12.43%),
followed by Africa (9.01%). Europe and America registered increases below the world average,
namely 6.12% and 5.33%, respectively (Table no. 1). The new destinations have registered higher
growth compared to older ones, and the proportions of different destinations in total changed,
Europe and the American continent having a declining share in the total number of arrivals (76% in
2000, compared to 81.5 in 1990 and 96% in 1950) (1).

Table no. 1. Arrivals of international tourists, 1950-2010 – annual average growth (%)
Asia and Middle
Period Total Africa America the Europe East
Pacific
1950-2000 6,8 8,3 5,8 13,1 6,5 10,1
1950-2010 6,79 9,01 5,33 12,93 6,12 12,43
1950-1960 10,6 3,7 8,4 14,1 11,6 12,3
1960-1970 9,1 12,4 9,7 21,6 8,4 11,5
1970-1980 5,3 11,6 4,0 13,9 4,7 14,3
1980-1990 4,7 7,8 4,1 9,3 4,1 3,1
1980-1985 2,9 6,1 0,9 7,4 2,7 2,7
1985-1990 6,5 9,5 7,3 11,3 5,4 3,5
1990-2000 4,6 6,4 3,3 7,0 4,1 9,6
1990-1995 4,2 6,1 3,3 8,0 3,5 7,3
1995-2000 4,9 6,7 3,3 6,0 4,7 12,0
2000-2010 3,27 5,77 1,72 6,69 1,92 9,89
2000-2005 3,3 5,7 0,8 7,1 2,2 10,0
2005-2010 3,19 5,83 2,41 5,70 1,62 9,47

Source: Tourism Market Trends, 2006 Edition – Annex 3, World Tourism Organization (UNWTO); data processed
after Tourism Market Trends, 2006 Edition – Annex 10, World Tourism Organization (UNWTO) and UNWTO
Tourism Highlights, 2009 eidtion, 2010 edition, 2011 edition, World Tourism Organization (UNWTO)

Due to the fact that the five major areas experienced different rates of growth, the share of
these regions in the total number of arrivals changed. In 1950, the European continent recorded
66.67% of the total number of arrivals, and America had a share of 29.76% in the total number of
arrivals (Figure no. 2). This situation was explained, on the one hand, by the purchasing power
which offered the inhabitants the chance to travel, and, on the other hand, by the potential and
experience of those states in the tourist sector. In 1980, the share of these destinations decreased to
64.19% and 22.4%, respectively, and in 2010 to 50.70% and 15.94%, respectively. At the same
time it was also noticed an increase in the share of the other large areas, particularly those of Asia
and the Pacific (from 0.79% in 1950 to 21.68% in 2010).

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The USV Annals of Economics and Public Administration Volume 13, Issue 2(18), 2013

Africa; Africa;
Africa; Middle
Middle Middle 5,26
1,98 2,59 East;
East; America
East; America
America 6,41 ; 15,94
0,79 2,55 ; 22,40
; 29,76

Asia and
Asia Asia
the Europe;
Europe; and the and the
Europe; Pacific; 50,70
66,67 Pacific; Pacific;
64,19 8,27
0,79 21,68

Figure no. 2. The structure of arrivals of international tourists in the five major zones of the
world in 1950, 1980 and 2010 (%)
Source: graph elaborated using the data from Tourism Market Trends, 2006 Edition – Annex 3, World Tourism
Organization (UNWTO) and UNWTO Tourism Highlights, 2011 edition, World Tourism Organization (UNWTO)

In Asia and the Pacific, the economic development stimulated the tourist activity, too (the
growth being two or three times higher than the global average). This also explains the increasing
share of these destinations in international tourism. In the last decades, the Middle East has also
registered intense development of tourism. This progress was due to both economic development of
Asian countries and to some new phenomena taking place in Europe and America, such as the
decrease of competitiveness of the available tourist products, the lack of balance between quality
and price, the saturation of the tourist demand in those areas. Even so, Europe continues to have a
significant share in international tourism.
Regarding the receipts from international tourism, they increased 400 times between 1950
and 2010, especially after 1970. As in the case of arrivals, the largest share of these receipts
(approximately 45%) belongs to Europe, followed by Asia and the Pacific with 27%, and by
America with approximately 20% (2). Similar to the number of arrivals, the receipts also registered
a decline in 2009, when they went down in real terms with 5.7% (3), only to resume their ascending
trend in 2010. Moreover, we can notice the different growth rates of receipts, and so Asia and the
Pacific recorded the largest increase, followed by the Middle East.
Figure no. 3 presents graphically the receipts obtained from international tourism between
1950 and 2010. One can see the progress registered by the tourist phenomenon, as well as the
growing share of the new tourist destinations, such as Asia-Pacific and the Middle East.

1000
900
800
700 Middle East
600 Europe
500 Asia and the Pacific
400 Americas
300 Africa
200
100
0
1950 1960 1970 1980 1990 2000 2010

Figure no. 3. The evolution of receipts from international tourism, 1950-2010 (billions USD)
Source: graph elaborated using the data from Tourism Market Trends, 2006 Edition – Annex 10, World Tourism
Organization (UNWTO), UNWTO Tourism Highlights, 2010 Edition and 2011 Edition, World Tourism Organization
(UNWTO)

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The increase in the number of arrivals was not equal to that of the receipts, so that, within 60
years, the number of tourists increased more than 30 times, unlike the receipts which rose over 400
times. This situation was determined by people’s higher income and better living standards, which
made it possible to spend more money on tourism (the choice of more distant destinations, longer
stays). It was noticed, however, that part of this increase in absolute values in the receipts obtained
from tourism is a consequence of the inflation phenomenon, namely, the changes of the parities of
national currencies against the US dollar and its depreciation.

THE MAIN TOURIST DESTINATIONS OF THE WORLD. THE PLACE OF E.U.


IN THIS CONTEXT

It was found that there is a close link between tourism and economic growth: the developed
countries are visited by a larger number of tourists and score substantial receipts. Also, certain
characteristics of the countries (such as tourism potential and the level of overall development) can
lead to the classification of a state as a country with inbound and / or outbound tourism. In the
tables below, there are highlighted the rankings of countries by the number of arrivals and by the
receipts obtained from international tourism, as well.
The main tourist destinations of the world include countries with remarkable tourist
potential, and this ranking does not register significant changes from one year to another. It can be
noticed that five of the top ten world tourist destinations are EU countries (marked in Table no. 2),
which shows the importance of tourism activity in this area. France and Spain (with 8.02% and
5.57%, respectively, of international tourist arrivals) take the first and fourth places in the ranking.
As far as the other countries are concerned, the USA hold the second position with 6.47% of the
arrivals, followed by China with 5.57%. Referring to their surface (as compared to the USA), it can
be stated that for France and Spain the international tourism is of great importance. From the data
included in Table no. 2 we can see the polarizing tendency of the tourist activity, the top ten
countries absorbing almost half of all international tourist arrivals.
Table no. 2. The main tourist destinations of the world, 2012
No. Contry Arrivals of international Market share
tourists (millions) (%)
World 1035 100,00
1. France 83 8,02
2. USA 67 6,47
3. China 57,7 5,57
4. Spain 57,7 5,57
5. Italy 46,4 4,48
6. Turkey 35,7 3,45
7. Germany 30,4 2,94
8. United Kingdom (UK) 29,3 2,83
9. Russian Federation 25,7 2,48
10. Malaysia 25 2,42

Source: UNWTO Tourism Highlights, 2013 Edition, World Tourism Organization (UNWTO), p.6,13

Regarding the ranking of the receipts obtained from international tourism, it appears that,
here, we can usually find the same countries that have the highest number of arrivals. Thus, the
USA have the highest receipts from international tourism, which means almost 12% of the one
obtained worldwide. In this ranking, the USA are followed by Spain, France and China, which
record 5.20%, 5.00% and 4.65%, respectively, of the global receipts. Moreover, important shares
are registered by Italy and Germany (over 3.5% of the total, each), followed by the United Kingdom
(3.39%) (Table no. 3).

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Table no. 3. Ranking of receipts from international tourism in 2012 and their share in total

No. Country Receipts from Share in total world


international tourism receipts from
(billions USD) international tourism
World 1074,936 100,00
1. SUA 126,2 11,74
2. Spain 55,9 5,20
3. France 53,7 5,00
4. China 50 4,65
5. Macao (China) 43,7 4,07
6. Italy 41,2 3,83
7. Germany 38,1 3,54
United Kingdom
8. (UK) 36,4 3,39
9. Hong Kong (China) 32,1 2,99
10. Australia 31,5 2,93

Source: UNWTO Tourism Highlights, 2013 Edition, World Tourism Organization (UNWTO), p.6, 8-12

As in the case of arrivals, we can see that five of the top ten countries in this ranking of
receipts obtained from international tourism are EU members (marked in the table). This evidence
points out that tourism holds a special place within the economy of those countries. The importance
of the role of tourism in the EU is also underlined by the fact that, in the member countries, almost
20 million people are directly or indirectly involved in the tourist activity, whose contribution to the
gross domestic product of the EU countries represents, on the average, 4% (4).
As far as the expenditure on international tourism is concerned, we notice that, generally,
the countries which get high receipts from this type of tourism, are to be found on the first places in
the ranking of the international tourist expenditure. The outbound tourism focuses on a pretty small
number of countries, with a high level of development, whereas the inbound tourism includes a
larger number of countries. Regarding the countries with outbound tourism the people who spend
the highest amount of money on international tourism are the Chinese (9.5% of the total expenditure
on international tourism), followed by the Germans and the Americans (7.8%) and by the British
(4.9%) (Table no. 4).

Table no. 4. Ranking of expenses for international tourism in 2012 and their share in total

No. Country Expenses for Share in total world


international tourism expenses for
(billions USD) international tourism
World 919 100,00
1. China 102 9,5
2. Germany 83,8 7,8
3. USA 83,5 7,8
4. United Kingdom (UK) 52,3 4,9
5. Russian Federation 42,8 4
6. France 37,2 3,5
7. Canada 35,1 3,3
8. Japan 27,9 2,6
9. Australia 27,6 2,6
10. Italy 26,4 2,5
Source: UNWTO Tourism Highlights, 2013 Edition, World Tourism Organization (UNWTO), p.13

In the ranking of the expenditure on international tourism, one can see that four of the top
ten countries with outbound tourism are EU members, too.

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EU has a significant share in world tourism. Several graphs come to prove this assertion,
also highlighting its progress in the recent years. Figure no. 4 shows the upward trend registered by
the number of international tourist arrivals, both globally and within EU. We notice that the growth
rate in Europe is lower than in other parts of the world, having as a result a decrease of the EU share
in total (from about 49% to around 39%). Yet, the EU share in the total number of international
tourist arrivals remains very high - 39.2% in 2011.

E.U.
E.U.
100,00
1200000000
90,00

1000000000 80,00

70,00
800000000
60,00

50,00
600000000
40,00
400000000 30,00
49,63 48,46 48,79 49,33 48,91 48,12 47,40 46,89 47,79
44,51 43,79 43,81 42,05 40,81
20,00 40,55 39,01 39,20
200000000
10,00

0 0,00
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

a) b)
Figure no. 4. The evolution of arrivals number of international tourists in the world and EU
a) values; b) share of EU in total
Source: graphs elaborated using data from http://data.worldbank.org, World Tourism Organization, Yearbook of
Tourism Statistics, Compendium of Tourism Statistics and data files

Concerning the receipts gained from international tourism, figure no. 5 illustrates their
development both globally and in EU. As with the number of arrivals, it can be seen that in the EU
the growth rate is slower than in other areas of the world, which causes a decrease of the EU share
in total (from 44.6% to 37.07%). Even under these circumstances, the EU continues to score
substantial receipts from international tourism, which exceed one third of the amounts recorded in
the world.

E.U. E.U.
1400000 100,00
90,00
1200000
80,00
1000000 70,00

800000 60,00
50,00
600000
40,00

400000 30,00
45,40 44,26 43,25 43,31 42,81 41,78
20,00 44,60 43,43 42,07 44,24 44,08 41,86 42,14 42,72 40,10 36,64 37,07
200000
10,00
0 0,00
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

a) b)
Figure no. 5. The evolution of receipts from international tourism in the world and EU
a) values (millions USD); b) share of EU in total
Source: graphs elaborated using data from http://data.worldbank.org, World Tourism Organization, Yearbook of
Tourism Statistics, Compendium of Tourism Statistics and data files

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The USV Annals of Economics and Public Administration Volume 13, Issue 2(18), 2013

The analysis of these data shows that in the EU economy, tourism is of great importance,
both due to the receipts obtained and to its role in stimulating other economic sectors. Also, as it is a
sector in which mechanization cannot be introduced on a large scale, the performance of any tourist
activity involves the creation of many jobs.
The analysis of the trend of the tourist indicators referring to tourist arrivals and receipts
revealed an intense development of the tourism phenomenon all over the world. It may be
considered that the expansion of the tourist activity is determined by several factors, of which the
most important are (5):
 The economic recovery of certain underdeveloped regions;
 The variety and extent of tourism development: launching new tourism products,
diversifying services, facilities regarding costs, customizing the tourist package;
 The growing interest of the developed countries for the culture and the tourist
potential of the developing countries;
 The population’s high availability, in terms of income and free time, to travel abroad
(due, in particular, to the economic growth which ensures prosperity). The tourism
demand is related to the amount of the population’s income (which lays the
foundations for the development of this field), as well as to the leisure time of every
person. Also, the increasing average lifespan made that a large part of the elderly
population travel, contributing to the development of tourism activities;
 The increased intraregional and interregional trade due to the current trend towards
privatization and deregulation;
 The technical progress, which contributes to the development of tourism by
increasing the population’s mobility, but also through its beneficial influence on the
improvement of the accommodation units and the quality of the services provided.
Thanks to progress, the means of transport have been upgraded and diversified. The
long-distance journeys have become more accessible, by cutting down transportation
prices, improving comfort and reducing the journey time.
 The increasing role of informatics within the distribution systems, which helped to
improve the quality and diversify the services offered by tourism agencies, by
connecting the units to a computer-based reservation system.
 People’s tendency to get away from the crowded cities (for recreation, rest and
relaxation, both on holidays and at week-ends).
The tourism development however, is hampered by factors that have a negative influence
upon it. Among them we can mention: the lack of financial resources necessary to fully exploit the
tourism potential in certain areas, but also the risk of dealing with conflicts (between tourism
developers and local communities), when the entrepreneurs’ actions are in contrast with the
environment protection norms.
Also, there are the circumstantial factors that have a negative influence on tourism, such as
economic and political crises or the armed conflicts (the most striking examples in this respect
being Greece and Egypt).
In the context of the growing influence of certain events (including crises) on tourism, the
demand forecast has gained considerable importance. The improvement of the techniques used for
formulating forecasts of tourism demand is necessary, especially for estimating the impact of the
unexpected events on this demand, but also because the forecasts help with the elaboration of the
policies which concern this field of activity.

CONCLUSIONS

Over the last decades, tourism has known significant development in all five major regions
of the world. The different growth rates caused a change in the shares of these regions, so that the
corresponding percentages of old destinations like Europe and America in the total number of

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The USV Annals of Economics and Public Administration Volume 13, Issue 2(18), 2013

international tourist arrivals are smaller than half a century ago (approximately 50% and 16%,
respectively, in 2010). A similar situation is noticed in the case of receipts obtained from
international tourism. Even if the new tourist destinations in Asia and the Pacific or Middle East are
increasingly demanded, Europe continues to be the first choice as a tourist destination in the world.
Five countries in Europe, which are also EU members, are among the top tourist destinations in the
world, absorbing over 20% of the international tourist arrivals and of the receipts from international
tourism. EU has a significant share in the number of international tourist arrivals and in the receipts
from international tourism. These numbers continue to grow, although not at the same pace as in
other parts of the world, fact which determines a slight decrease of the EU share in total. Even
under these circumstances, EU has a notable share, recording 39% of the total number of
international tourist arrivals and 37% of the receipts from international tourism. This evidence
points to the importance of tourism industry for the EU economy, taking into account the receipts
obtained and the jobs created by means of tourism.

ENDNOTES

(1) According to UNWTO data


(2) According to UNWTO data
(3) UNWTO Tourism Highlights, 2010 edition, World Tourism Organization (UNWTO), p.4
(4) Gh. Postelnicu – Introducere în teoria şi practica turismului, Editura Dacia, Cluj-Napoca,
1997, p.53
(5) Classification taken from O. Snak, P. Baron, N. Neacşu - Economia turismului, Editura Pro
Universitaria, Bucureşti, 2006, p.159 and completed

BIBLIOGRAPHY

1. Eurostat, European Commission - Europe in Figures, Eurostat Yearbook 2010,


Luxembourg: Office for Official Publications of the European Communities
2. Hall Derek R., Marciszewska Barbara, Smith Melanie K.– Tourism in the new Europe: the
challenges and opportunities of EU enlargement, CABI Publishing, 2006
3. Năstase Carmen, Popescu Mihai, Scutariu Adrian Liviu - Aspects regarding the global crisis
and its impact on tourism industry, Revista Economică, 2(55), 2011, pp.475-482
4. Neacşu Nicolae, Baron Petre, Snak Oscar - Economia turismului, Editura Pro Universitaria,
Bucureşti, 2006
5. Postelnicu Gheorghe – Introducere în teoria şi practica turismului, Editura Dacia, Cluj-
Napoca, 1997
6. Scutariu Adrian Liviu - Cercetarea fenomenului turistic din perspectivă regională, Doctoral
thesis, “Al.I. Cuza” University of Iași, 2013
7. Tourism Market Trends, 2006 Edition – Annex 3, World Tourism Organization (UNWTO)
8. Tourism Market Trends, 2006 Edition – Annex 10, World Tourism Organization (UNWTO)
9. UNWTO Tourism Highlights, 2010 Edition, World Tourism Organization (UNWTO)
10. UNWTO Tourism Highlights, 2011 Edition, World Tourism Organization (UNWTO)
11. UNWTO Tourism Highlights, 2013 Edition, World Tourism Organization (UNWTO)
12. UNWTO World Tourism Barometer, Vol.8, No.3, October 2010, World Tourism
Organization (UNWTO)
13. World Tourism Organization, Yearbook of Tourism Statistics, Compendium of Tourism
Statistics and data files
14. http://appsso.eurostat.ec.europa.eu
15. http://epp.eurostat.ec.europa.eu
16. http://data.worldbank.org
17. http://www.unwto.org/media/news/en/press_det.php?id=5361&idioma=E

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of Economics and Issue 2(18),
Public Administration 2013

FOREIGN DIRECT INVESTMENTS IN ROMANIA AFTER THE EU


ADHESION

Lecturer PhD Laura DIACONU (MAXIM)
Al. I. Cuza University of Iasi, Romania
dlaura_es@yahoo.com

Abstract:
The aim of the present paper is to analyse the evolution of the foreign direct investments (FDI) attracted by
Romania between 2007 and present, taking into consideration the fact that there were two main determinants during
this period: Romania’s adhesion to European Union and the economic and financial crisis. Considering these aspects,
the main objectives of the paper are to identify the way in which the FDI evolved in the period immediately after EU
adhesion, by the sectors of activity, and to determine the impact of the economic crisis on the FDI attracted by
Romania. In order to achieve these objectives, we have collected, tabulated and interpreted the data included in various
statistical reports and databases. The results show that the relatively low unit labour cost, fiscal facilities, geographical
location, large internal market and the adhesion to the EU made Romania become one of the most attractive countries
from the Central and Eastern Europe for the foreign investors. However, the economic and financial crisis influenced
the country’s development and, implicitly, the evolution of the foreign direct investments inflows, especially after 2009.
Therefore, in Romania there was a negative trend of the FDI during the last three years, with slight signs of
improvement in the end of 2011.

Key words: foreign direct investments, multinational firms, competitive advantages, EU adhesion, economic
and financial crisis

JEL classification: F21, F23

INTRODUCTION

The transition from a centralized economy to the a market economy determined Romania to
elaborate various policies in order to attract the foreign investors, especially due to the fact that
investments are considered a key factor for surpassing the gap between developing and developed
countries. The most important facilities given by the government to the foreign investors are various
safeguards against the risk of nationalization, income tax exemptions for the foreign direct
investments (FDI) in agriculture, in the exploitation of the natural resources or in industry, for a
certain period of time after starting the activity. Besides these facilities, Romania also presents a
number of other advantages in attracting the foreign direct investments, among which we can
mention: its geographic position and the size of internal market; cheap and highly skilled labour
force; rich natural resources and fertile land; the EU and NATO memberships; bilateral agreements
signed by Romania with other countries concerning the promotion and reciprocal protection of
investments; favourable tax policy, involving reduced fees for investments in certain sectors;
improvement in the business climate, etc.
According to the specialized literature, foreign investors can be classified into three
categories, depending on the benefits persuaded on the Romanian market (OECD, 2008):
 Efficiency seekers: those who are attracted in particular by the low cost of the production
factors;
 Market seekers: investors which are particularly interested in the market size, the poor
domestic demand and in the easy access to local resources;
 Export oriented investors: those investors attracted by the export facilities and by the
advantageous geographical position.
At the beginning of the XXIst century, we see an increase in the number of the investors
attracted by Romania, especially after 2004. However, the evolution of the foreign direct investment
(FDI) was sinuous. In 2007, we notice that the FDI inflows totalled 7.25 billion euros, amount
which situated Romania on the first place in South-East Europe and on the second one in Central

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and Eastern Europe, after Poland. After the historical maximum value reached by these investments
in 2008 - 9.496 billion euros, they have significantly declined in 2009, when the impact of the
economic and financial crisis was strongly felt in Romania. Thus, in 2009, the number of the FDI
decreased with 48% and their value with 60%, compared to 2008, fact that has generated a 44%
reduction in the number of the new created jobs. However, in 2009, as well as in 2008, Romania
was ranked on the second position, after Poland, according to the value of the FDI inflows. The
downward trend of the investment flows has also continued during 2010 and at the beginning of
2011, only in the end of 2011 showing slight signs of growth in the context of some the economic
measures implemented by the government. Nowadays, the importance of maintaining the upward
trend of the attracted foreign investments is even greater as they largely contribute to the economic
growth, stimulating in and enhancing the internal factors of development.

AIM, OBJECTIVES AND RESEARCH METHODOLOGY

In the present study we intend to analyse the evolution of the foreign direct investments
between 2007 and present, by identifying their trend on two distinct time periods: 2007-2008 and
2009-present. This time period delimitation was necessary to achieve the established objectives:
 To identify the way in which the foreign investments have evolved in the period
immediately after EU adhesion, by sectors of activity;
 To determine the impact of the economic crisis on the FDI attracted by Romania.
In order to reach up these objectives, we have collected, tabulated and interpreted the data
included in various statistical reports, such as World Bank databases, Statistical Yearbooks of
Romania, developed by National Institute of Statistics (NIS), World Investments Reports of
UNCTAD, Annual Reports of Romania’s National Bank (NBR), the results of various researches
conducted by the Romanian Agency for Foreign Investments etc.

THE EVOLUTION OF THE FDI IN ROMANIA IN 2007-2008

After the EU adhesion, the positive trend of the foreign direct investments in Romania was
increasingly evident. In 2007, they recorded a value of approximately 7,100 million euros, while in
the first half of 2008, the FDI inflows have accumulated approximately 4.758 billion euros, the
attracted investments’ flow increasing with 2246 million euros, compared to the same period of the
previous year (NIS, 2007).
According to a report conducted by the Romanian Agency for Foreign Investments, the FDI
attracted by Romania in 2007 were structured as follows (Romanian Agency for Foreign
Investments, 2007):
 Other capitals (loans granted by parent companies to the affiliated firms from Romania)
that amounted 3.740 billion euros, representing 52.8% of the FDI;
 Reinvested profits, which totalled 2.368 billion euros, representing 33.5% of the whole
amount of FDI;
 Capital equities that amounted 0.968 billion euros, meaning 13.7% of the total FDI.
This performance in attracting the FDI helped Romania to occupy the first position in the
South East Europe and the 2nd place in Central and Eastern Europe, in 2007, after Poland (15.4
billion euros), surpassing countries with tradition in this area, such as Hungary and Czech Republic.
In terms of the structure by the activity fields of the value of the capital subscribed by
trading companies with foreign capital, in 2007 we notice the foreign investors' preference
especially for industry (49%) and professional services (30%), followed, at a considerable distance,
by sectors such as trade (10%), transport (7%), construction (2%), agriculture (1%) and tourism
(1%) (Romanian Agency for Foreign Investments, 2008).
The orientation of the foreign direct investments mainly towards the industrial sector can be
explained through the advantages offered by Romania in this field, such as the low price of the land

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compared to other countries from the region, the skilled cheap labour force, the production facilities
and the tradition in this field.
We notice the fact that the investors were mainly focused on the Bucharest-Ilfov region,
where we find the largest number of trading firms with foreign participation, from all the
companies, and the largest share of the subscribed social capital (more than 50%). On the next
places, but only in terms of the share of the trading companies with foreign capital, there are
situated the West, North-West and Centre regions. This unequal geographical distribution is caused
by the quality of the infrastructure and of the labour supply, the presence/absence of some important
opportunities and by the stability of the markets.
In 2008, the value of the FDI attracted by Romania reached the historical maximum,
totalling 9.496 billion euros (NBR, 2009). This value allowed the country to be ranked on second
position among the states from Central and Eastern Europe, after Poland, in terms of the FDI
inflows, exceeding even some countries that joined the EU earlier than Romania. Even in this year,
the investments’ distribution, by region and by sector of activity, was similar to 2007, the
Bucharest-Ilfov region and, respectively, the industrial sector attracting most of the investors (see
figure no. 1 and figure no. 2).

Figure 1. Geographical distribution of the Romania’s FDI, by regions, in 2008 (in %)


Source: NBR, FDI in Romania in 2008, 2009, http://bnro.ro/page.aspx?prid=4617#

Figure 2. Distribution of FDI in Romania, by the main activity sectors, in 2008 (in %)
Source: NBR, FDI in Romania in 2008, 2009, http://bnro.ro/page.aspx?prid=4617#
THE TREND OF THE FDI INFLOWS IN ROMANIA BETWEEN 2009 AND 2012

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The consequences of the economic and financial crisis started to be felt in Romania in 2009.
As expected, the crisis has also affected the inflows of the foreign direct investments, in 2009 the
number of FDI projects diminishing with almost 50% and their value with 60%. Consequently, the
volume of the newly created jobs has decreased by 44% (Ernst & Young, 2009). According to a
study conducted by Ernst and Young (2009), in 2009 Romania has attracted 75 foreign direct
investment projects, representing 2% of the total projects in Europe, and generated only 6384 new
jobs, while in 2008 there were created 11,403 new jobs through the 145 FDI projects. Considering
these values, it is not surprising why, in 2009, Romania was occupying only the seventh position in
an European ranking, from the point of view of the number of new created jobs.
Regarding the distribution of the foreign investments by sectors, in 2009 most of the FDI
were attracted by industry - 41% of total (NIS, 2009). On the next place we can find the financial
and insurance sector, followed by construction and real estate, commercial sector and
telecommunications. Within the industry sector, the manufacturing industry represented the main
hot-point for the investors (31.1% of the FDI).
In terms of the territorial distribution, it can be observed the same trend as in the previous
years: the large majority (63%) of the foreign direct investments was in the Bucharest-Ilfov region,
followed, at a large distance, by the central area (9%), the South-East part (7%), the South (7%),
West (5%) and, on the last position, the North-Eastern region with only 2%. The graphical
representation clearly points out an unbalanced geographical distribution, since more than half of
the investments were concentrated in the Bucharest-Ilfov region. The low volume of FDI from the
North-East region is cause by the fact that this area lacks material resources, skilled and young
labour force (due to migration) and proper infrastructure for investors.
According to a study conducted by the National Bank of Romania (NBR, 2010), from the
point of view of the origin country, we can notice that Netherlands has the largest percentage of the
investments made in Romania (21.8%) in 2009, followed by Austria (18.1%), Germany (13.4%),
France (8.5%) and Greece (6.6%).
The UNCTAD Report, released in the end of July 2010, indicates that Romania and the
whole Europe were still influenced by the negative effects of the economic and financial crisis and
by the financial markets’ instability (UNCTAD, 2010).
In this context, in 2010, the FDI inflows in Romania dropped by more than 65%, reaching
2.2 billion euros, which represented less than one third of the level recorded two years before. To
stop the downward trend and diminish the negative consequences, the Romanian government tried
to revive the appetite for investments in 2010, offering state aids of 214.5 million euros. This
measure had the desired effect, being attracted 10 investment projects with a value of 711.7 million
euros, which led to the creation of over 4,700 new jobs in different fields, such as Pirelli tire
factory, Renault Technology testing centre, the aerospace components factory - Premium Aerotec ,
Prod Aaylex agricultural complex etc.
Analysing the overall investment inflows throughout Central and Eastern Europe in 2010,
we can notice that the Romania’s performances in attracting FDI are higher than those recorded in
most neighbouring countries, being doubled by the highest level of the exports from the whole post-
communist history of Romania. Thus, the country has ranked the third in a top of the Central and
Eastern European states, in 2010, Poland maintained its leading position, followed by the Czech
Republic.
In a ranking developed by UNCTAD (2012), in terms of performance index of the countries
in attracting FDI, calculated by dividing the percentage of the FDI that belongs to each state from
the total investments by the share of its GDP in the global GDP, Romania was ranked on the 73
place from 141 countries analysed in 2010, occupying an inferior position compared both to 2008
(42nd place) and to the previous year (63rd position, in 2009). However, we consider that the
calculation method of the performance indicator does not include all the factors that determine the
attractiveness of a location for FDI. The GDP share in the world GDP does not include, for
example, the taxation level of a country, the degree of corruption and bureaucracy. Therefore, we
believe that applying this method for determining the performance indicator, we cannot accurately

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identify the attractiveness of a country. For example, the developed countries have a high GDP and,
consequently, the denominator’s value of this performance indicator will be high, making the FDI
performances to be neglected. Taking the case of Germany, we notice that even if it is the second
largest destination for the FDI in the EU (46.1 billion dollars in 2010), according to the
classification developed by UNCTAD it is ranked only on the 104 position. Another significant
example is that of Great Britain: although it is the third EU country according to the level of the
FDI received, it ranks on the 76 place considering the performance in attracting the investments.
In 2010, the countries that invested the most in Romania were Netherlands (27.03% of total
investments), Austria (11.3%) and Germany (8.48%). According to the statistics of the National
Bank of Romania and National Institute of Statistics, Netherlands has invested about 11,000 million
euros in our country (NBR&NIS, 2011).
As it was expected, most of the FDI were directed to the Bucharest-Ilfov region (62.2%) and
the least percentage was recorded, again, in the North-Eastern Romania.
In terms of investments’ distribution by activity sectors, the greatest part of FDI was focused
on the manufacturing industry (32%), where the best represented branches are the oil processing
one, the chemicals, rubber and plastics branch (6.9% of total), the metallurgy (5.3%), the industry
of transport means (4.9%), the food, beverages and tobacco’s industry (3.9%) and cement, glass and
ceramics industry (3.2%). The next place is occupied by the financial services and insurance, which
amounted 19.1% of total FDI, followed by the retail trade, with 12.4% (see figure no. 3).

Figure 3. FDI’s distribution in Romania, by sectors of activity, in 2010 (in %)


Source: NBR&NIS, Foreign Direct Investments in Romania in 2010, 2011, http://www.bnr.ro/Investitiile-straine-
directe-(ISD)-in-Romania-3174.aspx

Because of the economic and financial crisis, the foreign direct investments continued to
decline in 2011, reaching a level of 1917 million euros, with 13.6% lower than in the previous year.
However, Romania was better situated than the neighbours from the South part of the Danube.
According to the statistics, the foreign direct investments showed a significant increase in
February 2012, reaching a value of 230 million euros, much higher than in January, when the
National Bank of Romania reported only 23 million euros (OECD, 2012).
The largest number of the foreign affiliates was held, in 2011, by the Italian companies, and
the highest rate of turnover was carried out by the subsidiaries of German companies. The average
turnover of a foreign subsidiary was 14.6 million RON and the gross added value was 2.9 million

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RON. As it can be seen from figure no. 4, the highest number of foreign subsidiaries in 2011 was in
the trade sector.

Figure 4. Number of the multinationals that invested in Romania in 2011, according to the
activity sectors
Source: OECD, FDI in Figures 2012, OECD Database, 2012,
http://www.oecd.org/industry/internationalinvestment/investmentstatisticsandanalysis/FDI%20in%20figures.pdf

In 2011, from all the active companies from the Romanian economy, the foreign affiliates
totalled 25,835, which represent a percentage of 5.3%. In terms of the share of these branches by
activity sectors, we see that the highest percentage was in industry, while the lowest was in trade
(4.2%). In industry, it was also recorded the highest rate of turnover: 44.4% of the total turnover of
the foreign affiliates.
Depending on the distribution of the foreign affiliates by location, it is found that the share
of those located in the EU Member States is 71.4% of the total number of the subsidiaries (18,446
companies), compared to 28.6% as it is the share of the subsidiaries from the countries outside EU.
The 2011 turnover value of the multinationals that have invested in Romania, according to the
country of origin, can be seen in figure no. 5.

Figure 5. The 2011 turnover of the multinationals that invested in Romania, according to the
main origin countries
Source: OECD, FDI in Figures 2012, OECD Database, 2012,
http://www.oecd.org/industry/internationalinvestment/investmentstatisticsandanalysis/FDI%20in%20figures.pdf

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CONCLUSIONS

The Romania’s adhesion to European Union, in 2007, made the country more attractive for
the investors. Consequently, in 2008 the volume of the FDI has reached the maximum historical
level. Unfortunately, this ascending evolution did not last for long due to the fact that the
consequences of the economic and financial crisis were strongly felt after 2008, when the level of
the FDI attracted by Romania has been gradually diminishing, each year. Only in the end of 2011
and beginning of 2012 there were felt slight signs of increase in the investments’ level.
From the point of view of the main sectors towards which the FDI were directed after 2007,
it is easy to observe that, by far, the industry was the main hot-field for the investors. Considering
the geographical distribution of the FDI, we notice that, during all these years, the Bucharest-Ilfov
region has attracted the majority of the investments, while the North-East part of the country had
the smallest percentages. One of the main explanations for this situation is given by the quality of
the infrastructure and the available labour force.
In our opinion, Romania will continue to be attractive for the foreign investors, since it has
highly qualified labour force and the production costs are lower than in other EU countries.
However, it is very likely that the disparities between regions, regarding the amount of the FDI
attracted, to continue to be a delicate problem for the next years. The analysis of these aspects might
represent an interesting topic for a future research.

REFERENCES

1. Ernst&Young (2009) South Central Europe Attractiveness Survey 2009, www.bia-


bg.com/uploads/files/_oldsite_analysis/f_2_57808_south_central_europe_attractiveness_2009
1.pdf, accessed in December 2012.
2. IMF (2011) ‘Economic Policies and FDI Inflows to Emerging Market Economies’, IMF
Working Papers, www.imf.org/external/pubs/ft/wp/2011/wp11192.pdf, accessed in December
2012.
3. NBR&NIS (2011) Foreign Direct Investments in Romania in 2010,
http://www.bnr.ro/Investitiile-straine-directe-(ISD)-in-Romania-3174.aspx, accessed in
January 2013.
4. NBR (2010) Annual Report, 2, http://www.bnro.ro/Publicatii-periodice-204.aspx,
accessed in January 2013.
5. NBR (2009) FDI in Romania in 2008, http://bnro.ro/page.aspx?prid=4617#, accessed in
December 2012.
6. NIS (2007) Foreign Direct Investments in Romania, http://www.insse.ro/cms/rw
/pages/comunicate/arhiva%20ISD.ro.do, accessed in October 2012.
7. NIS (2009) Industry Statistical Bulletin,
www.insse.ro/cms/rw/pages/arhivaBuletine2009.ro, accessed in October 2012.
8. OECD (2012) ‘FDI in Figures 2012’, OECD Database, www.oecd.org /industry/
internationalinvestment/investmentstatisticsandanalysis/FDI%20in%20figures.pdf, accessed
in January 2013.
9. OECD (2008) FDI in Romania: Evolution and main types of large firms in the
manufacturing sector, www.oecd.org/dataoecd /24/53/40401008.pdf, accessed in March 2012.
10. Romanian Agency for Foreign Investments (2008) Annual Report - 2007,
http://www.romtradeinvest.ro/index.php/ro/intro/investitii.html, accessed in January 2009.
11. UNCTAD (2012) World Investment Prospects Survey, http://unctad.org/en/docs
/diaeia_en.pdf, accessed in January 2013.
12. UNCTAD (2010) World Investment Report, http://unctad.org/en/docs/wir2010, accessed
in March 2012.

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of Economics and Issue 2(18),
Public Administration 2013

UKRAINIAN-LATVIAN ECONOMIC COOPERATION


Researcher of CNU, Semen KHOROSHENIUK
Chernivtsi National University, Ukraine
semen8989@mail.ru

Abstract:
In the article the author examines the legal framework of economical cooperation between Ukraine and
Latvia. Extracts basic and promising areas of economical cooperation between two countries. Analyzes future of
economical cooperation. Emphasizes the importance of economic cooperation, which is a promising direction for
Ukraine. Experience of Latvia should be used in their own economic transformations to let this process be successful.

Key words: Ukraine, Latvia, trade and economic cooperation, development, investment.

JEL classification: F 30, F 50

INTRODUCTION

Today, economic cooperation is an important sphere in foreign policy of every country,


that’s why all countries must build high quality cooperation system. The theme of Ukrainian-
Latvian cooperation was chosen to find out how Latvia developed its own economic system, to
determine main arias of economic cooperation between two countries, perspectives in future. This
theme is very important for Ukraine, because Latvia can share the experience in her own way to
create good economical level and relations with neighbors. Ukraine must use this experience,
involve new methods and to increase inner economical situation. This process is long-term, but at
the end it will increase the level of living and Ukraine will be competitive in a world arena.

A NEW STAGE OF ECONOMIC COOPERATION WITH UKRAINE AFTER


LATVIAS ACCESSION TO THE EU

The Diplomatic relations between Ukraine and the Republic of Latvia, the former Soviet
republics - were set after gaining their independence in February 12, 1992.In August the same year
between the two countries an agreement was signed on the development of trade and economic
cooperation between Ukrainian Government and the Government of the Republic of Latvia, for
implementation of the provisions of which in 1995 was created a prototype of Ukrainian-Latvian
intergovernmental commission in question of economic, industrial, scientific and technical
cooperation - Ukrainian-Latvian intergovernmental commission in questions of trade and economic
cooperation, which entered into force in June 22, 1995. [3]
After joining the EU Latvia joined the big foreign economic space - human potential of
more than 300 million people. All barriers were removed for the movement of capital, labor and
the country received access to the "four freedoms". This provided an opportunity to participate in
international division of labor within the European dimension. Latvia has the opportunity to benefit
from international funds that are designed to align the economies of the member states, to raise
depressed areas, to carry out reforms in local government.
No doubt, the new status of Latvia provided certain changes in relations with Ukraine. The
beginning of a new stage of cooperation between Ukraine and the Republic of Latvia in science and
technology sphere was in 2004. Due to the denunciation since May 1, 2004, as a result of accession
of Latvia to the European Union, the Agreement between the Cabinet of Ministers of Ukraine and
the Government of the Republic of Latvia about the Free Trade and Agreement between the
Government of Ukraine and the Government of the Republic of Latvia on the establishment of
Ukrainian-Latvian intergovernmental commission on trade and economic cooperation and given the
desire of the support and strengthen of economic, industrial, scientific and technical cooperation on

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October 5, 2004 in Riga signed the Agreement between the Government of Ukraine and the
Government of the Republic of Latvia on economic, industrial, scientific and technical cooperation,
which entered into force on February 1, 2006 [1].
To ensure the development, strengthening and diversification of economic, industrial,
scientific and technical cooperation between the two countries on a reciprocal basis, in the areas
referred in the Article 2 of the Agreement, was established Intergovernmental Commission on
economic, industrial, scientific and technical cooperation.
The composition of the Intergovernmental Commission in accordance with Article 3 of the
Agreement includes representatives of relevant authorities and may be invited representatives of
business structures to participate in its work, which is in the form of meetings. Meeting of the
Intergovernmental Commission held as necessary, but not earlier than once a year alternately in
Ukraine and Latvia.
Since 2007 there were five meetings of the Intergovernmental Commission. Following each
meeting of the Intergovernmental Commission a protocol is creating. It becomes a kind of "road
map" for states in the coming year.
The main objectives of the Intergovernmental Commission are:
- discussion the programs of economic, industrial, scientific and technical cooperation in
areas of mutual interest;
- promoting the creation of necessary conditions for granting loans and providing finance for
economic, industrial, scientific and technical cooperation;
- promoting cooperation between small and medium-sized enterprises;
- promoting the creation of appropriate conditions for the participation of businessmen of
both countries in international exhibitions and fairs that take place on the territory of the
Contracting Sides;
- cooperation on the development of environmentally friendly infrastructure systems. [2]
The first meeting of the Intergovernmental Commission was held on May 11, 2007 in Riga,
assisted by experts of relevant ministries and agencies, and representatives of the business
community in Ukraine and Latvia.
Transportation and transit industry, fuel and energy sector, industry, agriculture, tourism,
scientific and technical cooperation were considered the most promising areas of trade and
economic cooperation between the two countries.
However, at a meeting of the Intergovernmental Commission was discussed the fact of
reductions in 2005-2006 the amount of trade turnover, recovery trends in its further growth in 2007,
it was observed intensification of industrial activities and the presence of positive dynamics of
mutual investment in the economy of both countries. Members of the Intergovernmental Committee
noted that the current volume of economic cooperation between Ukraine and Latvia don’t meet the
potential of the two countries and expressed interest in further boosting bilateral trade and economic
relations.
Among other things, the sides agreed to hold a meeting of experts of the Ministries of
Education and Science of Ukraine and Latvia to develop a project of Ukrainian-Latvian cooperation
in research and technology to support intensification of scientific and technical cooperation.
The second session of the Commission, chaired by the Minister of Economy of Ukraine
Bohdan Danylyshyn and Minister of Economy of the Republic of Latvia Artis Kampars was held in
Kyiv on June 4, 2009.
The sides exchanged information on the status of implementation of the Protocol of the first
meeting of the Commission and the provisions of the Program of economic cooperation between
Ukraine and the Republic of Latvia for 2008 - 2009 and noted that the overall position of the
documents are done or in a progress. It was agreed to develop a program of economic cooperation
between Ukraine and the Republic of Latvia for 2010 – 2011.
As for the acceleration of scientific and technical cooperation Ukrainian side proposed to
establish a working group on scientific and technical cooperation and to hold the first meeting in the
first quarter of 2010, during which to identify priority areas of cooperation between the countries in

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science and technology.


June 4, 2009 the Federation of Employers of Ukraine and Latvian Employers Confederation
signed the Regulation on the establishment of business cooperation between Ukraine and Latvia.
This body was established to promote and expand economic cooperation between Ukraine and
Latvia and provide necessary support for the Ukrainian-Latvian intergovernmental commission on
economic, industrial, scientific and technical cooperation and to coordinate the work of the
Federation of Employers of Ukraine and Latvian Employers Confederation of promoting
international economic and humanitarian connections. [9]
The third meeting of the Intergovernmental Commission, as agreed by the Sides, was held
on July 29, 2010 in Riga. The Commission paid particular attention to bilateral cooperation in the
transport sector. The sides confirmed their interest in increasing the volume of traffic between
Ukraine and Latvia, including by bringing goods for container train ZUBR. With this aim they will
continue working on the Agreement on the transport of goods between Ukraine and the Republic of
Latvia and the transit through their territory.
The fourth meeting of the Commission was held in June 29, 2011 in Kiev. During the
meeting was signed the Plan of Implementation of the Agreement on the main directions of
cooperation in the field of consumer protection between State Committee for Technical Regulation
and Consumer Policy of Ukraine and the Ministry of Economics of Republic of Latvia for 2011-
2012.
In the framework of the meeting a bilateral business forum was held.
The fifth Commission meeting was held on 4-5 July 2012 in Riga. Ukrainian delegation was
headed by Deputy Minister of Economic Development and Trade of Ukraine , Chairman of the
Commission V.V.Bandurov Ukrainian , Latvian - Minister of Economy of Latvia D.Pavlyut , who
is chairman of the Latvian part of the Commission. The meeting was attended by experts from
ministries and departments of Ukraine and Latvia, as well as representatives of business circles of
both countries.
Sides discussed prospects of cooperation in business, industry and construction,
transportation and transit, energy, agriculture and standardization, accreditation , certification,
metrology, science and technology assessment and consumer protection , regional cooperation.
Particular attention was paid to the European integration of Ukraine. The introduction of
free trade between the EU and Ukraine will create new opportunities for the development of trade
and economic relations between Ukraine and the Republic of Latvia was mentioned in this question.
During the fifth session of the Commission a roundtable also was held for entrepreneurs of
both countries , chaired by the heads of the Ukrainian and Latvian Commission , during which were
discussed the problems and prospects of bilateral business cooperation. Presentation of the
industrial potential of Luhansk region. In addition, the Round Table Agreement was signed on
cooperation between the Luhansk Regional Chamber of Commerce and the Latvian Chamber of
Commerce.

COOPERATION IN TRADE, INVESTMENT SPHERES

Latvia is ready to become Ukraines "springboard" for further jump in the other countries of
Northern Europe. It plays a leading role in the countries of Baltic-Scandinavian region, that’s why
Ukraine should prove extremely activeness in this area. This strategy has been successfully
implemented because of growing volume of trade with the three Baltic states. For example, the
trade turnover between Ukraine and Latvia in 2004 grew up to 30% and reached 472 million $. It is
not the limit, because it is quite real to achieve in the coming years the volume of trade in 1 billion
$. [10]
The largest investors in the economy of Latvia are EU countries: Sweden, Germany and
Denmark and also Baltic states. There is a great activity from Lithuania, which actively invests in
building of supermarkets. Over $ 2.5 billion was invested in the economy of Latvia. On this
background, Ukrainian-Latvian investment cooperation looks pretty good. In the economy of

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Ukraine there are almost 72 million $. From Ukraine to the economy of Latvia was invested nearly
$ 14 million. For this indicator, Ukraine ranks 17 th position. The share of Ukrainian investments -
a financial and banking sector. In Latvia, there are four commercial banks with Ukrainian capital.
[11]
Latvian-Ukrainian relations in the field of economics have great potential for development.
Being the second largest country in Europe, Ukraine is attractive for Latvian entrepreneurs as its
geographical location and extensive market opportunities. The main sectors of the Latvian-
Ukrainian cooperation are trade, financial and other services.
The main products that Ukraine imports from Latvia are: products of chemical and allied
industries, vehicles, textiles and textile products, machinery and mechanical appliances; pulp, paper,
cardboard, food. Latvia, in turn imports from Ukraine: metals and metal products, mineral products,
vehicles. In 2005, the accumulated direct investment in Latvia Ukraine were 9.67 million euros and
investments in Latvia in Ukraine -8.43 million euros (according to the Bank of Latvia). [12]
Another form of deepening of economic and business cooperation between the two countries
is conduction of joint business forums. Thus, in accordance with the Memorandum of
Understanding between the Ukrainian Union of Industrialists and Entrepreneurs (UUIE) and the
Latvian Investment and Development Agency (LIDA) since 2004 is held annually Ukrainian-
Latvian business forum that became active mechanism for expanding the range and volume of trade
and economic cooperation between business entities in Ukraine and Latvia.
Supported by the Embassy of Ukraine in Latvia and Latvia in Ukraine, on November 22,
2006 in Kiev at the Chamber of Commerce hosted the III Ukrainian-Latvian business forum
organized by UUIE and the State Agency for Investments and Innovations from the Ukrainian side,
LIDA and Latvian -Ukrainian business Council from Latvian side.
The business forum was attended by representatives of 32 Latvian companies and 60
companies from Ukraine. They presented such industries of economy like woodworking, transport,
pharmacological, metalworking and food processing, light industry, energy sector, finance and
banking, engineering and others. Participants discussed the current state of trade and economic
cooperation, prospects and direction for expanding bilateral cooperation, they had an opportunity to
establish business contacts between the two countries. [7]
Ambassador of Ukraine to Latvia R.Chilachava estimating the economic cooperation
between the two countries, said that "we are moving away from the prevailing trade in bilateral
relations (turnover of nearly 0.5 billion U.S. dollars, of course, considerable, but had not correspond
with possibilities of our countries) and proceed to investment-cooperative and innovative high-tech
cooperation.”All the necessary conditions and, most importantly, willingness from both
governmental and the level of business”, said R. Chilachava.
During the Forum was decided to open in early 2007 in Riga representation of Ukrainian
Union of Industrialists and Entrepreneurs, which will be headed by authorized representative of the
Union of Latvia Chairman of Latvijas tirdzniecibas banka Armand Shteynberhs. Among the foreign
partner countries Ukraine is only on 18th place in export and on 13th in import. The joint turnover
is only 1.7 % of the total Latvian foreign trade. This is not enough and there is a hope that in the
nearest future the situation will change for the better.
Vice -President of the Ukrainian Union of Industrialists and Entrepreneurs (UUIE) , Tatiana
Stepankova clearly defined strategy and development of relations between Ukraine and Latvia . She
noted that the International Transport Corridor (ITC) North - South is very important from
geostrategic point of view and in geopolitical terms. This applies to all energy states adjacent to the
ITC so and feasibility. It is no accident that this path was mastered by our ancestors - they chose the
shortest route and they did not "scratched their left ear with the right hand". It is logically this way
to revive, restore and simplified.
We need to structure the relationship and realize what mutual cooperation prevents. Now
trade between the two countries seems to be increasing, but relations remain at the level of "buy -
sell" According to T. Stepanova, we need to increase innovation, scientific, economic, cultural,

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scientific and technical cooperation. Because Ukraine’s strategy - a strategy for innovation
breakthrough. Do not enter into something or someone, namely its own strategy.
The volume of investments from Ukraine into the economy of the EU on 01.07.08 amounted
to 5949.1 million $, or 96 % of total investments from Ukraine (on 01.07.07 – 84.4 mln. $, 32.1 %).
Major investments allocated to Cyprus - 5826.3 million $ (97.9 % of total investments in the
EU), second and third place occupied Poland and Latvia to the economy of which from Ukraine
received 49 and 32.4 million $.
According to the Bank of Latvia during the IV quarter of 2009 Ukrainian investments in
Latvia are 37 million LVL (investments invested primarily in financial intermediary sector).
According to the company Lursoft on 3 June 2010 Ukrainian investment in the capital of
Latvian enterprises was 63.5 million LVL and there were 421 Ukrainian – Latvian co- enterprises.
During 9 months of 2010, the number of bilateral trade in goods and services had an amount
of 222.5 million. USA (reduction for 13% compared to the same period last year): exports - 141
million.$, imports - 81.5 million. $. Positive balance for Ukraine was 59.5 million $. [4]
The largest investors in the Latvian economy are:
• Private Bank Open Joint Stock Company Commercial Bank - Investments 30,36 mil. LVL
- 75% of shares of JSC «PrivatBank»;
• Southern JSC - Investments size 9,30 million LVL - 91,14% shares of JSC "Regional
investment bank";
• Borulko Victor - investments 7.00 million LVL - 99,97% shares of LLC "Bank
investment";
• Borulko Alla - Investments 6,04 LVL - 84,23% shares of LLC "Notum" (legal services);
• Kramnoy Vyacheslav - Investments 2,13 LVL - 27,97% shares of JSC "Baltic International
Bank"); 33% stake in LLC «AFC». [8]
Within the framework of Ukrainian-Latvian business forum which was held during the visit
of the President of Ukraine Viktor Yanukovych in Latvia on December 15, 2010, a memorandum
about creation of a "Latvian-Ukrainian Trade House" was signed. A document was signed by
Chairman of the Board of the International Fund "Edynuy Svit" Eduard Prutnik and president of the
Latvian company «Eiroholdings» Vasil Melnyk.
Signed memorandum has a framework character and defines the functions of "Latvian-
Ukrainian Trade House" in promoting of general trade and investment projects, including countries
of the European Union.
According to Melnyks words, trade house will work in the sphere of engineering and
agriculture. He said: "We will also consult businesses which will wish to work on the markets of
Ukraine and Latvia and will help them. We hope that the private trading house will work more
efficiently than government agencies ". [6]
According to the Ministry of Foreign Affairs of Ukraine, scientific and technical cooperation
between Ukraine and Latvia in 2009 was directed at promoting the developments of Ukrainian
scientists to the Latvian market and bringing new technologies to Ukraine from Latvian companies.
[13]
In the context of development of cooperation in the field of energy conservation, which is
important for both countries, we should note the importance of conducting of the Conference on
efficient use and restore of energy in the countries of "Eastern Partnership", which was held in Riga.
Ukraine was represented by the Ministry of urban engineering. The main attention was paid to
cooperation with energy efficiency and increase the share of renewable resources, the use of already
accumulated European experience. [14]
Taking into account the popularity of the exhibition “Tech Industry 2009” Embassy of
Latvia in Ukraine promoted participation of the Ukrainian side in events which were held during the
exhibition. In the seminar "New solutions in engineering - science and intersectoral cooperation" in
the framework of exhibition “Tech Industry 2009” participated Deputy Chairman of the State
Agency of Ukraine in investments and innovations, gave a presentation on investment policy in
Ukraine during the global financial crisis. [14]

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In addition, it should be noted that Ukraine, as well as Latvia is an associate member of the
program EUREKA (European Research Coordination Agency), whose mission is to strengthen the
competitiveness of European economies by supporting commercial campaigns, research centers and
universities who carry out projects to develop innovative products : products, processes and services
based on new technologies. [5]

CONCLUSIONS

Thus, Ukraine and Latvia strive to further intensify of bilateral economic cooperation,
resulting in the growth of trade and investment indicators. Economic ties between the two countries
deepened thanks to the Ukrainian-Latvian intergovernmental commission on trade and economic
cooperation, which worked in 1995-2004 and the Ukrainian-Latvian intergovernmental commission
on economic, industrial, scientific and technical cooperation, which began working since 2006.
Ukraine is also working to increase its presence in the services sector, developing transit,
transport. Black and Baltic strategic vector acquires increasing importance within the priority
tagged by the EU in the development of transport infrastructure in the north – south direction. This
transit transport component could become strategic direction of partnership between Latvia and
Ukraine in international transportation between the regions of Baltic and Black Seas.
Future of cooperation depends on how Ukraine can show its full potential, reliability and
willingness to cooperate, rather than a desire to get regular loans and concessions from other
members of the international community. It is only on the cooperation in the economic sphere.

REFENCES

1. Agreement between the Government of Ukraine and the Government of the Republic of
Latvia on economic, industrial , scientific and technical cooperation. Agreement was ratified by
Law N 3041 -IV since 02.11.2005 , VVR , 2006 , N 4, Article 56, online:
http://zakon.nau.ua/doc/?uid=1079.3403.0
2. Agreement between the Government of Ukraine and the Government of the Republic of
Latvia on economic, industrial , scientific and technical cooperation. Agreement was ratified by
Law N 3041 -IV of 02.11.2005 , VVR , 2006 , N 4, Article 56, online: :
http://zakon.nau.ua/doc/?uid=1079.3403.0
3. Agreement between the Government of Ukraine and the Government of the Republic of
Latvia on the establishment of Ukrainian - Latvian intergovernmental commission on trade and
economic cooperation. The agreement stopped the force due to the entry into force of the
Agreement of 05.10.2004, online: http://zakon.nau.ua/doc/?uid=1079.387.2
4. Dashkevych Y.,(1999) Baltic- Black Sea alliance in pursuit of a phantom / Y.
Dashkevych / / Universam,1-2,11.
5. Horohovatska M.Y. The innovative element of international cooperation, online:
iee.org.ua/files/alushta/48-gorohovatska-innov_skladova.pdf
6. Memorandum on the establishment of "Latvian- Ukrainian Trade House ", online:
http://www.uniworld.org.ua/news/media/2010/12/17/1621.html
7. Pavuk O.(2006) A question about transportation of energy resources, 39, 59. online:
http://www.baltic-course.com/rus/archive/rus
8. Relations with Western Europe, Northern Europe and the Baltic States. Portal "Ukraine
and the
World".online:http://www.kmu.gov.ua/control/uk/publish/article%3Fart_id=223269081&cat_id=22
3259211
9. Situation Council on cooperation between Latvia and Ukraine since June 4, 2009, online:
http://ua.fru.org.ua/mizhnarodne-spivrobitnictvo/ugodi/rada-dilovoi-spivpraci-mizh-latviyeyu-ta-
ukrainoyu/

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10. Tuzhikov M. Baltic springboard (2005), Baltic Course, 33, 49, online:
http://www.baltic-course.com/rus/archive/rus
11. Ukraine's foreign policy and the way countries in Europe. Project, January- June
2007,Center for Peace, Conversion and Foreign Policy of Ukraine , 2007, 11
12. Ukraine's foreign policy and the way countries in Europe. Project, January- June 2007,
23
13. Ukraine's foreign policy and the way countries in Europe. Project , January- June 2007,
23
14. Ukrainian - Latvian cooperation in the field of science and technology cooperation .
Website of the Embassy of Ukraine in the Republic of Latvia, online:
http://www.mfa.gov.ua/latvia/ua/26039.htm
15. Ukrainian - Latvian cooperation in the field of science and technology cooperation .
Website of the Embassy of Ukraine in the Republic of Latvia, online:
http://www.mfa.gov.ua/latvia/ua/26039.htm

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The USV Annals Volume 13,
of Economics and Issue 2(18),
Public Administration 2013

DISPROPORTIONS IN THE WORLD ECONOMY


Anatolii VDOVICHEN, PhD, docent
Chernivtsi Trade and Economics Institute of KNTEU, Chernivtsi, Ukraine
danjapolina@ukr.net

Abstract:
The article presents a systematic study of global economic development processes, in particular through the
prism of definition the disproportional changes in the financial and real sectors of the global economy and concretize
the impact of the information sector of the world economy on the two above mentioned.

Key words: disproportions; global crisis; information revolution; real and financial sector of the world
economy.

JEL classification: E60

INTRODUCTION

The world has catastrophically changed during the last years – it has become global, to be
exact, it had been made that sort by the most powerful countries, headed by USA. They had created
unexampled in the history of humanity system of coercive globalism – "the machine of world
exploitation". At the same time globalism, as a new malignant system of world order leads to
system crisis cycle of world society, ruins the stableness of the value forms of the world order,
undermines the state-oriented structure of international relations. According to this, the research of
disproportion changes in financial and real sectors of global economic space, which define its
character, aim characteristics and vector orientation are of currant importance.
Among the scientific works, which contain the fundamental development of issues,
connected with uneven character of the world economy development at different stages of its
development, it is worth to note the works of the following foreign scholars: S.Amin, M.Baskakova,
D.Bell, B.Binchak, M.Bunkina, I.Wallerstein, V.Vildanov, H.Gereffi, H.Horh, T.Dos Santos,
M.Drahilov, N.Zotova, V.Inozemtsev, F.Kardozo, T.Kolafi, K.Koulin, V.Kudrova, G.Mid,
T.Mitton, T.Moran, H.Myurdal, K.Omae, J.Pevzner, F. Perry, E.Pletnov, J.Prymakov, D.Rikardo,
G.Robinson, U.Rostou, A.Smith, J.Tinberhen, A.Hirshman, J.Shumpeter and others.
This problem is actively examind by the Ukrainian scientists, economists, including
L.Antonyuk, O.Bilorus, V.Budkin, I.Burakovskyy, Z.Varnaliy, V.Heyets, I.Hladiy, B.Hubskyy,
I.Kalenyuk, T. Kal'chenko, H.Klymko, Yu.Kozak, D. Lukyanenko, Z.Lutsyshyn, Yu.Makohon,
O.Mozhovyy, T.Oryehova, Ye.Panchenko, Yu.Pahomov, O.Plotnikov, A.Poruchnyk, O. Rogach,
V.Rokocha, L.Rumyantsev, Ye.Savelyev, V.Semynozhenko, V.Sidenko, S.Sidenko, N.Tatarenko,
A.Filipenko, T.Tsyhankova, V.Chuzhykov, O.Shvydanenko, L.Shynkaruk, I.Shkola and others.
Their works are dedicated to the research of the neoteric processes, which happen in global
economy, analysis of interregional and internal regional disproportions, skewness, misbalance of
social and economic development, transnationalization of economic systems and processes of
forming global competitive environment, economic divergence and convergence of the countries,
global financial integration and processes of techno-globalism etc.

ANALYSIS OF DISPROPORTIONAL CHANGES IN FINANCIAL AND REAL


SECTORS OF WORLD ECONOMY

However, many aspects of this many-sided scientific problem stay insufficiently discovered
and well-founded. First of all the further exploration is required for the processes of global
economic development, in particular through the prism of definition of disproportional changes in

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financial and real sectors of world economy, which has determined the choice of the topic of this
article, its aim and task, which are the following:
- analysis of disproportional changes of the development in financial sphere of the world;
- analysis of disproportional changes of the development in real sector of world economy;
- concretization of the influence of information sector of the world economy on the
development of real and financial sectors.
As it is indicated in the researches of the Corresponding Member of NAS of Ukraine
O.Bilous, the growing virtual global geoeconomics of financial speculative technologies deforms
not only traditional industrial economics but post-industrial, as well. The world economy protective
mechanisms are being ruined, global information monitoring, total transparency of weaker
economies are being used. Globalizing world economy, according to the conclusion of foreign and
Ukrainian scholars, is becoming even more unstable, disposed to cyclic crises, as well as non-cyclic
crises 2007-2009 (Bilorus O., 2011, pp. 5–6).
Only for the last four decades the mentioned system had led to unexampled world crisis –
first non-cyclic crisis of the global capitalism, which will inevitably become the universal and will
have continuous character. It is hard to disagree with the conclusion of O.Bilous that the
consequences of the crisis are irreversible, because it contains an internal conflict and the
mechanism of self-destruction. The essence of this mechanism is in taking to extremes the system
of monopoly exploitation of the world through the mechanism of artificial demand, exaggeration of
needs and overconsumption of material, financial and intellectual resources in extremely limited
circle of hegemonic countries, first of all in the United States. This system created by USA acts
through the international outsourcing which had become the effective mechanism of
overconsumption (Bilorus O., 2011, pp. 5–6).
In such a way, first time in history in 2007-2008 the global total crisis of overconsumption
started in USA. Before it 777 cyclic crises of over-production had happen. It is very difficult to stop
this crisis, as its bearers, generators and driving force are the most powerful countries of the world,
which will fully fight for preservation of their special privileged status of consumption society. Last
40 years the GDP per capita increased from 20000 to 40000 USD and consumption per capita
increased from 100000 to 150000 USD. Financial and economic crisis of 2007-2009 has
demonstrated structural imbalance in world and national economy systems. Moreover, fundamental
structural imbalance had been formed during last 15-20 years and it consists in disproportion
between financial and real sectors of economy. Lately the scope of operations on the world financial
market was much larger than the demands of global production and trade in monetary instruments
and increased annually by 15-20 % (Baranovs'kyy O.I.,2009; Solodovnik O.O., 2010; Umantsiv
Yu.M., 2009).
In such a way, at the end of the 20th, the beginning of the 21st century scientists paid
attention of the world community to the dangerous structure of the agreements in the foreign
exchange market – only 15% of them were connected with the foreign trade operations and long-
term capital turnover, others had exceptionally financial character, but at the beginning of the crisis
only 5%-7% of the general amount of the agreements were connected with the real economy, others
were connected with speculative transactions (Bezchasnyy L., 2001; Dyba M.I. and Osadchyy
Ye.S., 2009; Solodovnik O.O., 2010; Umantsiv Yu.M., 2009).
In such a way, the income part of the financial sector in the USA GDP in 1960 was 14%,
and in 2008 – 40%. During the period of 1997-2007 only 5% of the population appropriated 38% of
the income and 50% of national patrimony, moreover budgeted deficit amounted 12% of GDP and
general dept of the USA was 54 trillion USD, which is more than world GDP. The debt economy
appeared, when the general debt of all the USA agents reached the index of 350% of GDP, in other
words it exceeded the country income in many times, moreover such increase happened just during
10 years, while this debt was 75% of GDP at the beginning (Bilorus O., 2011, pp. 7).
The analyzed period is also characterized by the discrepancy of temps of savings increase in
the countries with different level of industrial development, which caused essential shifts in the
structure of global savings – the part of the developed countries decreased by 15% (from 85% in

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1970 to 70% in 2005 (Naumenkova S.V. and Mishchenko S.V., 2009)) under the correspondent
increase of the scope of savings in the countries with developing markets. But the dynamic of
savings in the developing countries didn’t have well-defined long-term tendency. In such a way in
the biggest national economy – the economy of the USA – till the middle of the 1980s the citizens
saved approximately 7-9% of their current incomes, till the end of the century this part extremely
decreased and in 2001 it became negative, during the next four years savings renewed, and since
2005 the opposite tendency could have been noticed – Americans stopped saving and started
wasting saved during the previous years (Dyba M.I. and Osadchyy Ye.S., 2009). Moreover, in
almost all the industrial developed countries could have been observed the decrease of the
investment norms till the level which reached approximately 20% of GDP (Naumenkova S.V. and
Mishchenko S.V., 2009; Solodovnik O.O., 2010).
On the basis of the aforesaid we can state that simultaneously with the growth of the
financial markets sizes and scales of capital flows other noticeable disproportional changes of the
development in both financial sphere and real sector happened.
Disproportional changes of the development in the financial sphere of the world:
1. Changes in the objective orientations of bank establishments – reduce of the part of
credits, extended to industrial enterprises in favor of credits for the consumption expenditures of
households and the needs of commercial entities, which has led to weakening of dependence of
banks on the functioning of the industrial sector of economics.
2. Overflow of the substantial part of the bank assets to the sphere of non-banking financial
establishments, which was explained by the smaller requirements of regulatory bodies to this
establishments and had led to exceeding of the maximum level of correspondence of internal funds
and borrowed funds (in some financial institutions the level was 1:30, while for the deposit
institutions this level must be 1:10);
3. Strengthening of the innovation competitiveness, which forced financial institutions to
develop more and more complicated instruments and to propose them to clients on more attractive
terms each time (Bazylyuk A.V. and Duhin I.M., 2009; Mokryak V. and Mokryak E., 2009;
Naumenkova S.V. and Mishchenko S.V., 2009; Solodovnik O.O., 2010).
In its turn, the faith of the modern global economy was considerably influenced by the
process of overactive forming of the “illusive” new economy of financial technologies, formation of
which is closely connected with the crisis of the Bretton Woods system (the beginning of 1970th) as
a result of refusal of the rudiments of “golden standard” (i.e. the principle of the material supply of
the monetary aggregate), the world of finances has become more independent and autonomic after it
had lost the straight dependence on physical reality.
Disproportional changes of the development in the real sector of the world economy:
1. Intensification of contradictions between national and international structures in the
process of realization of the strategic state interests and possibilities for transnational corporations
to achieve the superprofit.
2. Intensification of global competitiveness which stimulated companies to widen the scope
of their activity with the temps, which meet the temps of the market growth or take the lead over it;
3. Growth of the deficit of energetic, material and rough resources and intensification of
disproportion in its distribution between countries.
4. Worsening of economic (prices escalation, growth of the part of transactional and
advanced costs in the structure of industrial costs, decrease of the income norms etc) and
institutional (influence of political priorities, artificial restriction of the competitiveness of
integrated industrial structures etc) conditions for industrial usage of the main manufacturing
resources;
5. Growth of the leading positions of developed countries at the global markets of products
and services, on which more important became not standard material goods, but services, scientific
and technical development and difficult technical complexes by individual order (Amosha O., and
others, 2009; Naumenkova S.V., Mishchenko S.V., 2009; Solodovnik O.O., 2010; Umantsiv
Yu.M., 2009; Vdovichen A.A.,2011)

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Since the beginning of 1980th could be seen more and more distinct transition from
regulated by countries economic system, established by Bretton Woods agreements of 1944, to the
system ruled by the markets of capital, headed by transnational corporations and transnational
banks. Consistent failures of neo-Keynesians at the beginning of 1980th and monetarists at the
beginning of 1990th can be mostly explained by the miscalculations of the completely new factor of
the world economics, which is independent transnational capital, which brings to nothing the
attempts to regulate internal financial markets.
Influence of this factor is not investigated by economic science yet. R.Baulo, one of the
authors of regulation theory considers that the "complicated world order" is established, according
to which the transnational capital is beyond the jurisdiction of countries and there is no "new
Keynes" for its scientific comprehension (Movsesyan A. and Ohnyetsev S., 1999, p. 58).
Appearance of independent transnational capital, which starts to live its own life is presented
by more than 500 transnational corporations (core of global economic systems), which has almost
unlimited economic power. At the same time in the developed countries a leading position in each
branch is taken by only two or three super giants who compete with each other on the markets of all
the countries.
According to the review of the journal "The Economist", 5 biggest transnational
corporations control more then a half of the world production of durable goods and also planes,
electronic equipment, automobiles and other production. Especially considerable is the level of its
concentration in the spheres, connected with the information technologies. For example, 2 or 3
companies control almost all the international network of telecommunications. Economic power of
the big transnational corporations can be compared with the GDP of the average countries and they
dictate their will to many countries (Mazur I.I.). The quantity of the global economic changes
developed into quality and transnational capital has become the independent economic organism
with its original structure and internal aims of the development.
As doctor of economic science Mazur I.I. indicates in his research, if a state could regulate
national foreign exchange market with the help of the strict financial control, then in the conditions
of financial markets liberalization and mitigation of the currency exchange regulation, transnational
capital receives the possibility to collapse financial markets of almost any country if desired. It can
be explained with the fact that the joint foreign exchange reserves of TNCs are now several times
larger than the reserves of all central banks taken together. On the opinion of the French economist
P.Velts, "transition of 1%-2% of the money supply, situated in the private sector can completely
change the parity of any two national currencies. Very often TNCs consider foreign currency
exchange transactions as the most profitable source of income" (Velts Р.,1996, p. 45). In such case
TNCs work at the same scheme as individual speculators, but more consistently and powerfully.
Analyzing the current state of the global economy, P.Velts concludes that "the result of global
strategies eventually becomes the creation of the integrated international trade and financial system,
compared to which nation-states act as secondary values" (Velts Р.,1996, p. 45)
Information revolution has become another reason which led to rapid virtualization of
money, which undoubtedly led to progressive growth of world finances. In the sphere of
information steams processing and spreading in the last few dozen years occurred considerable
technologic breaks. For example, the cost of the three-minutes telephone talk between New York
and London was reduced in 15 times since 1960 to 1990 and 9 more times for the next 9 years.
Concerning the average cost of the information processing (calculated per 1 mln. operations), it was
reduced from 75 USD in 1960 to 0,01 cent in 1990. As a result, it became possible to perform real-
time "virtual travel" of dozens and hundreds billions of USD by the electronic communication
channels from one country to another for many thousands kilometers. Mass distribution of personal
computers, the creation of the Internet has radically changed and will continue changing the
technology of production, distribution and consumption of goods and services, labor, and life of
hundreds millions people in even greater extent. (Mazur I.I.)
New financial reality occurred to be extremely viable. It had been formed in the conditions
of technologization, computerization and the liberalization of monetary and financial activities, free

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in both national networks and transnational world area. Rapid development of microprocessor
techniques, digital technologies, telecommunications had created necessary environment, able to
coordinate events and activities on a planetary level and efficiently perform various calculations and
payments in real time, immediately move their results in the form of "electronic money",
stimulating the rapid growth of a new global and financial civilization.
Technological combining of the ways of information and financial communications
contributed to the creation of new information and financial area and led to the rapprochement and
gradual integration of information and financial areas. Transnational capital, which in technologic
terms is based on global information and financial networks and also the lack of new acting
regulatory institutions and inability of the already existing to influence this process and to control it
gave rise to a new transnational information and financial oligarchy. Movement of capital across
national borders has reached unprecedented proportions. One-day transactions in the global
financial market exceed 2 trillion USD, while the annual turnover of a country like the USA is
about 1 trillion USD. Every day amount of international financial transactions in only the currency
markets of New York is 1,3 trillion USD, and this sum is even bigger at international equity
markets. (Skorov H. E., 2003, p. 4).
Spreading of the ideology of artificial demand and overconsumption promotion, values of
liberal democracy reinforce expectations of global civilization establishment, which must inevitably
create its own mechanisms to overcome the disproportion of the global management development,
which will be based on the laws of the globalization system and global economy and which will
subdue states and nations (Bilorus O., 2011).
In such a way, according to the opinion of O.Bilorus it is worth to mention the following
laws and patterns, breaking of which will lead to appearance of one or another disproportion with
the corresponding positive effect for some countries and negative for others, in particular:
1. World market had become global, so economy and the development strategy of each
country must be globally oriented.
2. All the counties must take part in the global competitiveness and, accordingly, become
globally competitive.
3. All the countries involved to the processes of global modernization must accumulate
correspondent resources and join global and regional integration unions.
4. Globalization and modernization are possible without westernization and
Americanization (the law of the global civilization pluralism). India, China, Russia are not ready to
follow American way, and to collect parasitic debts.
5. The system of the coercive Euro-Atlantic globalism preserves its positions. It is a global
diffusion of western modernism and a new stage of western imperialism (Bilorus O., 2011, p.8).

CONCLUSION

To support the aforesaid we can state the following:


Firstly, the level of the global competitiveness in different countries will differ, which can
cause conflicts. That is why it is not worth to expect market equality;
Secondly, world without borders – is an utopia, a kind of wishful thinking (but of course the
interest of those who want to make the world global in the removal of nation-states from the
political stage is understandable. In such a way there won’t be need to pay taxes and no one will
control their activity);
Thirdly, the states must conduct special protective function and to provide the survival and
stable development of correspondent nations and countries (in this case we talk about Ukraine,
Belarus, Russia and other countries, but developed countries also require state support).
So, during the last decades some contradictions in functioning of financial and real sectors
of economics were intensified and in relations between them. The gap between financial and non-
financial corporative sectors deepened and the signs of transformation of financial system into a

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separate segment of the economy were defined. A new global crisis – is a crisis of overconsumption
of money as a virtual, non-produced product.

REFERENCES:

1. Amosha O., Vyshnevs'kyy V., Zbaraz'ka L. (2009) Promyslova polityka Ukrayiny:


kontseptual'ni oriyentyry na seredn'ostrokovu perspektyvu / Industrial Policy of Ukraine:
conceptual guidelines for the medium term, Ekonomika Ukrayiny, №11, pp. 4–14.
2. Baranovs'kyy O.I. (2009) Aktual'ni problemy funktsionuvannya valyutnykh rynkiv /
Current problems in the functioning of foreign exchange markets, Finansy Ukrayiny, №4, pp. 13–
32.
3. Bazylyuk A.V., Duhin I.M. (2009) Finansova kryza u SshA: ekonomichna zakonomirnist',
tsilespryamovana aktsiya chy pokhybky v upravlinni kredytnym portfelem / The financial crisis in
the United States: economic pattern, purposeful action, or error in the management of credit
portfolio, Aktual'ni problemy ekonomiky, №8, pp. 184–192.
4. Bezchasnyy L., (2001) Onyshko S. Tendentsiyi na svitovomu rynku kapitaliv ta yikh vplyv
na investytsiynu diyal'nist' v Ukrayini / Trends in the global capital markets and their impact on
investment activity in Ukraine, Ekonomika Ukrayiny, №3, pp. 4–12.
5. Bilorus O. (2011) Politychna ekonomiya hlobalizmu i problemy strukturnoyi
modernizatsiyi natsional'noyi ekonomiky / The political economy of globalization and problems of
structural modernization of the national economy, Doslidzhennya mizhnarodnoyi ekonomiky:
Zbirnyk naukovykh prats', ed 2 (67), pp.3-26.
6. Dyba M.I., Osadchyy Ye.S. (2009) Vplyv inozemnoho kapitalu na ekonomichni protsesy v
Ukrayini / The influence of foreign capital on economic processes in Ukraine, Finansy Ukrayiny,
№11, pp. 35–46.
7. Mazur I.I. Prychyny finansovoyi kryzy v umovakh hlobalizatsiyi / The causes of the
financial crisis in the context of globalization,
http://www.ekmair.ukma.kiev.ua/bitstream/123456789/1649/1/Sapachuk_Prychyny%20finansovoi
%20kryzy.pdf, accessed September 8, 2013.
8. Mokryak V., Mokryak E. (2009) Bahatomirnist' i superechlyvist' pidpryyemnyts'kykh
oriyentatsiy: istoriya pytannya i suchasni realiyi / Multidimensionality and contradictions of
entrepreneurial orientation: Background and current realities, Ekonomika Ukrayiny, №11, pp. 15–
25.
9. Movsesyan A., Ohnyetsev S. (1999) Transnatsional'nyi  apital i natsional'nye
gosudarstva / Transnational capital and national states, Mirovaia ekonomika v mezhdunar. otnosh,
№6, pp. 55 – 63.
10. Naumenkova S.V., Mishchenko S.V. (2009) Problemy podolannya nehatyvnoho vplyvu
hlobal'nykh dysproportsiy ta formuvannya novoho heofinansovoho mekhanizmu / The problems of
overcoming the negative impact of global imbalances and the formation of a new geo-financial
mechanism , Finansy Ukrayiny, №3, pp. 23–36.
11. Skorov H. E. (2003) Kapitalyzmu 21 veka predstoit reshat' trudneishie zadachi / 21st
century capitalism would face an uphill tasks, Mirovaia ekonomika v mezhdunar. otnosh, № 2, pp.
3 – 8.
12. Solodovnik O.O. (2010) Dysproportsiyi rozvytku zovnishn'oho seredovyshcha
korporatyvnoho sektoru ekonomiky Ukrayiny / The imbalance of the environment of the corporate
sector of economy of Ukraine, Aktual'ni problemy ekonomiky, №7 (109), pp. 73-80.
13. Umantsiv Yu.M. (2009) Hlobal'ni finansovi vyklyky: svitovyy dosvid ta ukrayins'ki realiyi
/ Global financial challenges: international experience and Ukrainian Reality, Finansy Ukrayiny,
№1, pp. 73–85.
14. Vdovichen A.A. (2011) Teorytychni pidkhody doslidzhennya katehoriyi dysproportsiyi
/Theoretic approaches of disproportion category research, Visnyk Chernivets'koho torhovel'no-
ekonomichnoho instytutu, ed 3 (43), pp. 62-73
15. Velts Р. (1996) Mondialisation des villes et territoires L’economy d’archipel, Рагіs.

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of Economics and Issue 2(18),
Public Administration 2013

THE EVOLUTION OF THEORETICAL APPROACHES OF THE


CORPORATIONS’ ANALYSIS
Professor, Doctor of Economics Victor BAZILEVICH
Dean Faculty of Economics of Kyiv National Taras Shevchenko University,
Corresponding Member of National Academy of Sciences of Ukraine, Ukraine
decanat_econom@univ.kiev.ua, bazil@econom.univ.kiev.ua

Professor, Doctor of Economics Yuriy UMANTSIV
Kyiv National University of Trade and Economics, Ukraine
uman@knteu.kiev.ua

Abstract:
The article explores the basis of methodology of the corporations' analysis. It is summarized the theoretical
approaches to determine their economic substance. Characteristic features inherent in corporations are identified. It is
stated that the study of the evolution of scientific views on the problem of the formation and development corporations
in the world economic literature has revealed the most significant in terms of theoretical and methodological concept,
updated the need for scientific development of the problem of formation of corporations in the economic system.
Nowadays the scientists are united by a perception of corporations as a difficult economic institution, but there is no
unity of opinion on its essential features. Thus, a holistic theory of corporations is at the stage of active formation.

Key words: corporation, the evolution of corporate relations, corporate theory.

JEL classification: G 30, G 34

INTRODUCTION

The investigation of literature sources indicates that with the advent in the economic practices
of the first corporate forms of business the question of the effectiveness of their functioning were
always the subject of extensive scientific researches. The main subject field of scientific studies was
to analyze the relationships between the structural elements of the corporate, evolution of its
organizational forms and methods of interacting of key stakeholders – owners, managers, and state.
The corporation theory as one of the basic economic entities reflects the historical retrospective
of the patterns in the context of evolution the economics in general. Consideration of theoretical
interest in the recognized schools and movements, and individual scientists in the corporation can
determine the methodological framework to analyze the corporation (Sirko, 2004, p. 7). Formation
of scientific concepts of corporate relations begins not in the period of the first corporate forms, just
only in the XVIII century, exactly after their active dissemination in the world economic practice.
The principles of corporate theory was formed in the period of institutionalization of economics as a
separate branch of knowledge, therefore the analysis of enterprise first in the world's scientific
literature is carried in the classical models of corporate governance.

CORPORATION IN LIGHT OF THE CLASSICAL SCHOOL POLITICAL


ECONOMY OF A. SMITH, D. RICARDO, J.St. MILL

Problems of increasing scale and public nature of the share capital were first considered in the
scientific works of representatives of the classical school of political economy A. Smith, D.
Ricardo, J. St. Mill and other researchers. The leading role in the development of the market
environment was provided to corporation as the most effective form of functioning the business
entities. The main direction of research was to elucidate economic nature of corporate ownership.
One of the earliest works, in which was analyzed the possibility of fictitious foundation on the
principles of shareholder property and leaders attempting to abuse their position in the joint-stock
companies was the work of A.Smith (2001, p. 173-230) «Wealth of Nations. An Inquiry into the

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Nature and Causes of the Wealth of Nations». Analyzing the features of managers and owners of
trading companies, the scientist concluded that the management of such companies is characterized
by negligence and waste, as employees by nature of their position should be more interested in
defending their own interests. The problem of uncontrolled hired managers and the possibility of
using position to their advantage that was formulated by A. Smith (2001, p. 173-230), made a
vector and an object of research in the future.
To justify the need for the introduction the system of supervision over the actions of managers
is an important analysis of the nature of the share capital and its characteristics, J.St. Mill (2007) in
his «Principles of political economy» carries out analysis of positive and negative aspects of joint-
stock form of business, defining the specific of the economic nature of the corporation. The scientist
connects the creation of powerful large capital corporations with the increased efficiency
throughout the economy. The scientist points out that the principles of transparency are essential to
create a formal environment for public control by the shareholders and potential investors. The
requirement for promulgation of results of activity by requiring publication of reports about
financial status of corporations in the press is considered by scientist as the basis for effective
control and confidence in its stable development. J. St. Mill (2007, p. 251-252) considered that the
principle of transparency had an affect on success of the corporation more than opportunity to
accumulate significant capital by joint-stock enterprises.
However, J. St. Mill (2007), same as A. Smith, points to the obvious shortcomings of
organizational form of corporation, among which the main is the lack of economic interest of hired
management staff on the results of the company. Figuring out such negative signs of corporation,
according to the researcher, determines the need to control the owner over the action of managers
and the formation the system of restrictions for abuse. First and foremost, the definition of clear
rules for action of the managers and incentives of performance. Having substantiated the lack of
control over the actions of administrators, the scientist raised the question of the need to create
specific mechanisms to represent the owners’ interests of the corporation. However, it is clear that
at this stage of development of economic theory the problems of corporate practice were primarily
analyzed empirically and unsystematically, and interpretation of the basic concepts of corporate
relations was multi-valued and contradictory.

THE FORMATION AND DEVELOPMENT OF THE THEORY OF THE


CORPORATE STRUCTURES

K. Marx made a significant contribution to formation and development of the theory of


corporate structures. Cited in the works of the scientist provisions of on the delimitation capital-
property and capital-function, is the main characteristic of the new scale forms of organization the
production, it became the methodological basis for the justification of the fundamental features of
corporate evolution – separation of ownership and management. The most typical of stock
ownership K. Marx (2011, p. 479-482) calls the conversion actually functioning capitalist into a
mere manager, disposing people's capital, and the owners of capital – net owners, net cash
capitalists. Growth of production socialization based on the corporate concentration of capitals
leads, according to K. Marx, to the internal contradictions in the development of corporate capital.
Dualism of corporate capital defines also the dual nature of administrative work in the corporation.
On one hand, managers perform the function of supervision, organizing and controlling the
activities of the company, and on the other – the function of engineering the combination and
cooperation of labour and are paid for the sale of their labour power. Thus, there is a need for the
formation of a special system of capital control by the owners, which are almost isolated from the
process, the elimination of the contradictions between the private and the collective corporate form
of ownership within the social order Marx believed impossible, but posing the problems for the
development of corporate theory and practice of the institute of corporate governance can be
considered as significant methodological basis for further research.

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Ideas and projects of Marx from the basic contradiction of corporativism were developed by R.
Hilferding, who devoted considerable attention to the analysis of the functioning of capital
corporations. Exploring the features of the corporate form of business, the scientist allocated the
most important factors of corporate evolution, which determine the characteristics of its
organization and management. The researcher distributed them to the objective (ease of raising
capital, the possibility of accumulation) and subjective (the degree of interest in the management
company's performance, attempts to gain control of the corporation). Scientist substantiated the
proposition that without political economy analysis of the specific features of the corporate form of
business impossible to find out its nature and to realize the economic benefits and the practical
application.
The most significant feature of the corporate capital R. Hilferding defined the exemption of the
industrial capital from the functions of industrial entrepreneur. Great importance for the
development of corporate theory has provisions of R. Hilferding (1959) that the share capital is
owned by the company, not individual shareholders, and therefore individual shareholders are not
entitled to its alienation. A detailed analysis of the work of R. Hilferding (1959, p. 59-85)
"Financial capital" in the context of formation the national corporate theory of past testifies that this
fundamental work aroused considerable influence on the development of scientific concepts in
Ukraine.
Active influence of corporations on the economic life of society led to the considerable
scientific interest among Ukrainian scientists to these problems in the late XIX – early XX century.
This attention of economists to the problems of corporatization industry is explained by its
comprehensive nature and the great influence that took corporations on society. Thus, the famous
Ukrainian scientist D. Pikhno (1888, p. 48) emphasized a significant role of public companies in the
process of monopolizing that give ability to capitalist enterprises' to expand to unprecedented
enormous sizes. Now it is not uncommon that joint-stock companies, limiting their capital, turnover
and profits by tens of millions of rubles, or even hundreds. Among the major causes of monopolistic
structures was considered the concentration of production and capital. Scientist wrote that «the
desire to concentrate production is scheduled today in all branches of industry and start covering
even their local crafts, obviously, quite important to remove the effects of competition and pricing
by monopolies» (Pikhno, 1888, p. 160-161).
V. Zheleznov (1908, p. 279-281) investigated problems of joint-stock form of business, the
concentration of production and the various monopolies. Explorer noted the close relationship
between the concentration and monopolization of the industry, paying attention to the concentration
of capital was the primary cause of various types of monopolies. Scientist claimed that the
concentration of production was enhanced due to the formation of joint stock companies, which
were concentrated in their hands considerable amounts of tools often consist of very small particles.
Economist pointed to the fact that in terms of concentration of production significantly increased
competition, which often threatened the existence of enterprises. As a result, some companies are
trying to merge into even larger coalition called syndicates and trusts.

CORPORATE ENTREPRENEURSHIP BETWEEN THE END OF XIX AND THE


BEGINNING OF XX CENTURIES

It is clear that in the examined theoretical concepts first attempt to allocate capital-function
from property-function, and therefore update the problem of forming corporate structures. However,
the most active in the study and the scientific basis of problem is the effective functioning of the
corporation at the time of the rapid spread of corporate entrepreneurship in the XIX-XX centuries. It
was then that the formation of new methodological approaches and theoretical research areas of
economic realities neoclassical, Keynesian, institutional, in which issues of effective organization
and functioning of corporations are considered in view of various factors. However, common to
most of these approaches in the study of the evolution of the corporate economy becomes the
fundamental position of the growth differences between the collective form and the private

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character of corporate property, which determines the necessity of scientific studies synergies of
corporate entities. It was at the end of the XIX century in the economic literature appears a new
subject of scientific analysis – hired manager with the skills and qualifications perform the function
of capital management corporation (Suprun, 2009, p. 142-143).
In the framework of the neoclassical school of its founder A. Marshall deeply analyzed the
problem of formation the corporation. The scientist in his monumental work «Principles of
economics» develops approaches to the nature and role of large-scale production, which can only be
achieved with the use of potential of corporations. A. Marshall (2007, p. 295) draws attention to the
main advantages of this production, are, above all, in the economy of skilled labour, machinery and
raw materials. Subsequently, the researcher raised the issue of divergent interests of management
and shareholders of corporations as a significant scientific challenge. Scientist identified three
forms of corporate organization – namely, joint stock companies, public corporations and
cooperative associations, the common feature of which is the distinction between the functions of
capital management and capital ownership. Inside the corporation is formed stable core of owners
who controls the corporation and not sufficiently takes into account the interests of other owners. A.
Marshall (2007, p. 314-317) in order to neutralize the negative effects of such situation, offers the
potential cooperative association, the essence of which is to raise the subjects, run the risk of losing
certain resources, especially the shareholders to participate directly in the management of the
associated capital. Employee of the company gets a share of the profits, voting rights, speaking at
the same time the owner, and an employee, working on hiring.
At the beginning of XX century corporate relationships became the subject of special research,
which was due to the economic dominance of corporations in the business sector of the leading
countries and the specifics of corporate economic relations. A great contribution to the study of the
corporation as an entity of the economic process made the representatives of the institutionalism
theory. It should be noted that researchers tend to go beyond the methodological individualism
inherent in neoclassical theory and consider economic issues in a broad social context. This
facilitated the transition of the market economy to a qualitatively new stage in its evolution and led
to the formation of a new economic paradigm in the direction of mandatory accounting institutional
factors of social development. These processes are due also to the fact that in the early XX century
the corporations of leading countries were beginning to dominate the business sector.
Representatives of the various trends of institutionalism are almost the only ones in the
understanding of corporation as a complex and important economic institution. However, there are
different approaches to the interpretation of how and why the development of the corporation,
which led to its present organizational form. Formation of the content of the modern corporation
should be mainly from understanding it as the product of a series of organizational innovations, the
aim and the result of which can be considered as the minimization of transaction costs.
Institutionalism has emerged as heterodoxy (alternative) in neoclassical (orthodoxy) trend.
During the XX century institutionalism has become a leading trend of economic thought, the
subject of investigation as a social system organized by economic and non-economic institutions,
which are in the relationship, cooperation and development. Institutional economics combine
criticism of the neoclassical theory, the consideration of economic issues in a broad social context
and interaction with other branches of science, the idea of reforming the economy from the
standpoint of control and state regulation. Methodological basis institutionalism is an
interdisciplinary approach, the link to the right, sociology, political science and psychology,
historicism and evolutionism, and the analysis of economic and non-economic development
mechanisms (Hayday, 2008, p. 106-110).
T. Veblen (1984) first introduced into the economic lexicon the term «institution», defining it
as a common consciousness, a certain way of thinking, has a great community of people, and are
due to traditional customs, which are formed in the process of historical development. A scientist in
a number of works, including «The Theory of the Leisure Class», «Absentee Ownership: Business
Enterprise in Recent Times», analyzes economic processes from the perspective of the team and

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technology evolution. T. Whalen formulated the concept of the «leisure class» features of which is
the possession of a large property, waste and excessive consumption.
The conceptual basis of the research problems of corporate devices were laid by T. Veblen
(1984), who emphasized the importance of studying the economic theory of norms, customs,
traditions, and their evolution to inform decision making by economic agents. Representatives of
early institutionalism focused on three issues of corporate devices, namely, on the relationship
between labour and capital, the relationship corporations to small and medium-sized firms, as well
as the ability to overcome the contradictions between private and public interests by introducing
elements of public corporate control. In this context tests results, reported by T. Veblen (1984) in
«The Theory of the Leisure Class».
Corporations based on joint-credit basis only maximize profits and limit production. T. Veblen
(1984, p. 55-56) observes that the corporation economy leads to conspiracies, and therefore the
need for public control of the entire economy by eliminating ownership of the financial oligarchy
and reform the mechanisms of doing business.
The scientist analyzes the impact of corporate relations on the development of the market.
Researcher to the characteristic features of the latest stage of capitalism relegated the formation and
growth of corporations, the enormity of corporate ownership, the disappearance of free competition,
and others. Analyzing the nature of corporate conflicts in their evolutionary development, T. Veblen
(1984, p. 58-87) argued change of control of the company from the capitalist-owners to managers-
engineers. However, the main disadvantage of the corporate research unit called not the
concentration of production, leading to a monopoly, and the widespread use of credit and the
formation of the so-called «Absentee» (such as absent) ownership or ownership that is difficult to
comprehend. T. Veblen argues that the development of capitalism, the contradiction escalates
between production and business. Business, by definition of Veblen, represented the owner of
financial assets (or «absentee» ownership), and the industry – engineering and technical staff of
enterprises. Researcher in the most general terms outlined the problem of corporate devices and the
need for effective monitoring of attracting capital.

THEORETICAL APPROACHES TO THE ANALYSIS OF ORGANIZATIONAL AND


MANAGERIAL PROCESS IN THE MID-TWENTIETH CENTURY

New trends in the world economy in the second third of the XX century led to the emergence of
new theoretical approaches to the analysis of organizational and management process. The
disclosure of the economic nature of the corporation carried enormous influence of institutional
approaches in economic theory of the firm, based in the R. Coase (2002) «Nature of the Firm», and
continued in the work of A. Alchian, H. Demsetz, H. Simon, and others. In contrast to the
neoclassical theory of the firm, based on the assumption of rational decision making, this theory has
focused attention on the need to consider the preconditions analyze the behavior of firms in the
market of bounded rationality, uncertainty, more complex internal structure like that.
Important role in the development of a theoretical framework corporations played R. Coase’s
theory of substantial transaction costs. In the works of Ronald Coase (2002, p. 30-48) first formed
the concept of transaction costs arising from the imperfection of property relations and incomplete
information. Researcher formulated the problem, which later became the basis of the theory of
asymmetric information on the activities of the corporation. An important aspect of the transactional
theory of the firm is to avoid the situation of rational behavior of economic actors; the researcher
called it the opportunistic behavior. This behavior is associated with an attempt to realize their own
economic interests of certain subjects, often contradicts the interests of the company. Considering
this opportunistic behavior may be limited by harmonizing the interests of the company with the
interests of workers.
An innovative approach to research of institute corporations contained in the artistic heritage of
another American institutionalist – John Commons (1931). Analyzing the nature of the corporation
in the «Institutional Economics», Commons (in contrast to the approach of Veblen) concludes that

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there is the possibility of harmonization controversial interests of economic agents as a way of


achieving this may be along with the state, trade unions and corporations as well. Among the
institutions of collective action an extremely important role in the regulation of economic relations
belongs to legal norms. According to the scientist, the historical process of formation and
development of the corporate form of business is an eloquent expression of the effective interaction
between private interest and limitations defined by collective action.
Social and legal institutionalism of D. Commons found its reflection in such works as
«Institutional economics» and «Economic theory of collective action». The scientists examined the
evolution of capitalism, explaining the history of the corporate form of business results of private
interest and limitations of collective action. Corporation, according to the scientist, is an instrument
of aggressive subordination to the control of the entire system of social relations (1931, p. 648-657).
The approach of Commons made a significant impact on the further development of the institute of
corporation, claiming the ability to save transaction costs in the contract.
Studies of this institution of collective action, which is a corporation, directed Commons to the
thought that in the current economic system a corporation becomes not only an important institution
in the market competition, but also an instrument of subordination to its control of individual
behavior, including through action lawyers, leaders of social movements and others (Seligman,
1968 p. 79-88).
In the early XX century the development of economic analysis of enterprise problems
activated, which is caused by the increasing role of corporations in the world economy. In the same
period there was a problem to find new methodological approaches to the justification of economic
events that do not fit to the paradigms of traditional approaches. The latest economic trends,
denying the neoclassical ideas about a self-regulating nature of the market and enterprises,
including corporate, and became the basis for the emergence of keynesianism.
Investigating the causes and sources of the crisis in the economy, J.M. Keynes (1978, p. 15-57)
called attention to the most important trend of the economy, which is more complicated institutional
structure of society and the increasing role of corporations, when the owners of capital is almost
separated from the management of the corporation. According to the Keynes’s approach factors of
environment influence is involved to economic analysis that has become a major factor in the
formation of a new scientific approach to market development and justification of the need for
active state regulatory impact on the course of economic processes. Development of keynesianism
and its transformation into the methodological basis of regulatory policy in the majority of countries
have identified, among others, and international standards of corporate structures.
Significantly, that Keynes (1998, p. 274-275) called attention to the fact the corporations with
scaling up the signs and get status of public institutions rather than private companies. According to
scientists, large corporate enterprises, which in its activity is driven more by considerations of
maintaining the stability and reputation of the company (as opposed to trying to maximize
shareholder value) objectively tend to socialization. Keynes argued that this transformation happens
naturally. In addition, there should be a certain limit («perfect measure») of state control, must be in
the relationship between the coordinates of the individual subjects and the state.
The evolution of forms and trends of the corporate enterprise is reflected in the works of J.
Clark «Business acceleration and the law of demand» and «Social aspects of overhead». In these
works the first time is substantiated the necessity of the study problems of the functioning of
corporations to consider the cost of making decisions that are carried by entrepreneurs in the
management of the firm. These expenses are limited to institutional decision making in the
management of corporations, speaking thus the basis for the formation of certain restrictions for
business interaction (2004, p. 563-573).
Considerable and ponderable for development of ideas about an origin and evolution of
corporations, influences of institutes on development of these subjects are achievement of
representatives of institutional school of А. Berle, G. Means, D. North, О. Williamson, P. Druker, J.
Berngem and others. Distribution of property and management in corporations, qualificatory role of
managers was thus reasonable in development of corporations stipulated transformation of politics

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of large firms. Scientists created bases of the concept of formation of society of hired owners.
Researchers noted that a task of managers is not only the organization of activity of corporation, but
also definition of the purposes of the organization and long-term consequences of the accepted
decisions. Owing to development of scientific and technical revolution the number of professionals
which took places of experts and managers increases. Corporations became a leading form of
business, and in the activity are guided not only receiving profit, but also public interests. Thereof
there is a new antimonopoly type of corporations which can quickly transfer the the capital from
one branch to another, overcoming barriers.
Considerable degree discussion concerning definition of the nature of corporation after an exit
of work of the American scientists A. Berle and G. Means (1932, p. 9-35) «The modern corporation
and a private property» became more active, they argued that corporations represent a new form of
the enterprises, essentially differs from classical type of capitalist firms, characteristic for the XVII-
XIX century. It is a question first of all about concentration corporations of the huge capitals, the
crucial role in management with which is played by not so nominal owners-shareholders, but heads
of the companies. Scientists call such system «collective capitalism». However there is no
guarantee, on their belief that the corporate economy to serve public interests or at least interests of
shareholders, after all hired heads aren't interested in maximizing profit of firm, ignore market
factors, receive possibilities the legalized methods and different manipulations to limit the formal
rights of minority shareholders.
Further researches of essence, and also value and corporation role in economic system
developed within a neoinstitutionalism, undertaken to eliminate an extreme of market bias of
neoclassics. The neoinstitutionalism supplements methodology of research of corporations with
tools of the analysis of many institutional factors. The behavior is a question first of all of the
property right, the political power, risks, opportunistic behavior (Radyeva, 2010, p. 12). The Nobel
winner D. North (2000, p. 18) in work «Institutes, institution change and economy functioning»
pays attention to the economic organizations, developing for the purpose of use of all the
possibilities, take into consideration changes in property structure, and also many standards of
behavior and other informal restrictions.
But other Nobel winner Oliver Williamson (2001, p. 298) tried to analyse the major factors
stimulating processes of creation the corporate structures through a paradigm of development the
theory of transaction expenses. The researcher notes that «progressive evolution of modern
corporation fixes economy reflection on transaction expenses at each stage». According to the
theory of transaction expenses, generally economic activity occurs within long-term, complex, often
multilateral contract relations. The fullest statement transaction concepts was made by O.
Williamson when the modern corporation is investigated as difficult and important economic
institute and it should be considered as a product of a series of organizational innovations,
minimization of transaction expenses. Instead of treatment the firm as production structure, the
theory of transaction expenses argues that the firm (at least in most cases) is more expedient to
consider as the structure of management of agreements. The theory of transaction expenses allows
explaining distribution of economic activity between firms and the markets, and also the internal
organization, including aspects of its construction and the general size.
Functioning of corporate structures in the 70-80th years of the XX century became the active
sphere of studying that caused distribution of the theory of transaction expenses. This theory in a
modern look is branch of the institutional direction of the economic theory with its research of the
nature of the organization. The transaction approach to studying of corporations is characterized by
understanding of the internal corporate organization as important factor of economic efficiency, and
also treatment of structural distinctions between firms first of all as result of aspiration to
minimization expenses.
Such known scientists, as well as Joseph Alois Schumpeter and John Kenneth Galbraith in the
researches paid considerable attention on a role of corporations in development of capitalist system.
So, in particular, J. Schumpeter (2007, p. 466-467), in work «Capitalism, a socialism and
democracy» considers the corporate relations in aspect of business, proves their innovative essence.

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The researcher puts forward idea about stabilization a role of large corporations. The scientist
argues that large corporations often become object of criticism as monopolistically structures, their
activity in the form of establishment of stiff prices, conscious restriction of output and patent
control provides stability of capitalist system, playing a counterbalance role concerning innovations.
J. Schumpeter`s conceptual ideas about a role of large corporations and their interaction with the
competition gave an impulse to researches in the tideway of neoclassical tradition (on a market
mechanism, the prices, profit, firm), and also promoted development by institutionalists «the theory
of large corporation» as main agent of market process who forms own economic policy and carries
out long-term strategy of development.
For the research of the structure and features of management of corporation the significant
contribution was made by the representative of the social-institutional direction of the
institutionalism J. Galbraith (2008, p. 34). His main ideas can be generalized as follows:
а) the corporation is the institute, organizational structure of industrial economy which define
tendencies of development of modern society. Under the influence of scientific and technical
revolution the new stage in development of corporations ia a stage of mature corporation. Unlike
enterprise corporation of the 20-30 years, which purpose was maximizing profit, the mature
corporation is the collective organization, a public and collective property, a combination of the
advanced technical and technological systems to capital accumulation, the power technostructure.
Its purpose is self-financing of corporation and growth of the income of managers. Shareholders are
interested in increase of profit, however their power is limited. Scale of corporate business
characterizes by level of industrialization of economy.
J. Galbraith (2008, p. 35) involved such scientific concept as «technostructure». According to
statements of the scientist, «technostructure» is an association of the highest person, making
administrative decisions and new administrative elite (technocracy) that surpasses traditional
financial oligarchy. It supervises the highest posts in administrations and also leading posts in the
largest corporations and becomes an imperious class of the western society. According to J.
Galbraith, the corporations, dynamically developing possess huge volumes of the capitals, are
characterized by difficult organizational structure and as a whole make basis of industrial system.
The scientist calls them a basis of «new industrial society».
The power and management question in corporations is realized through revolution of
technostructure, J. Galbraith (2008, p. 40) calls technostructure as a combination of knowledge and
qualifications. The power, knowledge and organizing abilities are production factors.
Technostructure characterized such signs, as monetary compensation, identification with
corporation characteristics, aspiration to adaptation and protection of interests of the company. The
analysis is more whole technostructure and their ratio with the purposes of society testifies that the
corporation subordinates the market the society purposes. Maximizing profit isn't a main goal, and
growth of the income of managers for what stable position in the market, protection against risk and
uncertainty is necessary defining.
The main features of the transfer of power technostructure – loss of shareholder’s power,
managerial autonomy, loss of public credibility of the financiers, the rule of public opinion about
government. Modern enterprise prefers a corporation in order to adapt to the needs of
technostructure. It is these factors, which are the need to expand the scale of production to obtain
monopoly power, are not essential. Combining mature corporations is the basis of industrial society
in which corporations have economic power (control of prices, costs, consumers), technostructure
has real power in society, and there is a replacement market-industrial planning.
Trends in the global economic space indicate that the global market for the most efficient and
competitive is large corporations that own industrial, scientific and technical resources. Swiss
economist Н. Bortis (2007, p. 417) argues in this regard that the cartels may even have a positive
impact on the economy, since they help to maintain a sustainable business activity in the long term.

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CONCLUSIONS

Thus, the study of the evolution of scientific views on the problem of the formation and
development corporations in the world economic literature has revealed the most significant in
terms of theoretical and methodological concept, updated the need for scientific development of the
problem of formation of corporations in the economic system.
Generalization of theoretical approaches to the definition of corporations leads to several
conclusions. First, study the features of the economic nature of the corporation in economic science
was accompanied by radically reinterpretation the methodology and theoretical tools. Second, the
dominance of corporations, finally formed at the turn of the XIX and XX centuries, has been
recognized by scientists as fact-scale transformation of the economic system. Thirdly, today
scientists are united by a perception of corporations as a difficult economic institution, but there is
no unity of opinion on its essential features. Thus, a holistic theory of corporations is at the stage of
active formation.

REFERENCES

1. Bazylevych, E., 2004, History of economic studies. Kyiv. Knowledge.


2. Berle, A., 1932, The modern corporation and private property. New York. The
MacMillan Company.
3. Bortis, Н., 2007, Institutions, behavior and economic theory: the contribution to
classical-Keynesian political economy. Kyiv. Publishing house «Kyiv-Mohyla
Academy».
4. Coase, R., 2002, The nature of the firm: Origins, evolution and development. Kyiv.
ASK.
5. Commons, J., 1931, Institutional economics. American Economic Review. Volume 21.
p. 648-657.
6. Galbraith, J.K., 2008, The new industrial state. Favorites / J.K. Galbraith – Moscow:
Eksmo.
7. Hayday, T.V., 2008, Institutionalism paradigm: methodological context. Kyiv.
Publishing center «Kyiv University».
8. Hilferding, R., 1959, Financial capital: research the latest phase of capitalist
development. Moscow. Publishing House of Social and Economic.
9. Keynes, J.M., 1978, General theory of employment, interest and money. Moscow.
Progress Publishers.
10. Keynes, J.M., 1998, End laissez faire. Origins: historical issues of the economy and
economic thought. Moscow. Higher School of Economics. No. 3. p. 512.
11. Marshall, A., 2007, Fundamentals of economic sciences. Moscow. Eksmo.
12. Marx, K., 2011, Capital. Critique of political economy. Moscow. Penguin Books.
13. Mill, J.S., 2007, Principles of political economy with some applications to social
philosophy. New York: Penguin Books.
14. North, D., 2000, Institutions, institutional change and economic distortions. Kyiv.
Fundamentals.
15. Pikhno, D.I., 1888, Railroad rates. Research experience prices railway transportation.
Kyiv. Imex.
16. Radyeva, M.M., 2010, Development of corporate enterprises in Ukraine: institutional
approach. Zaporizhzhia. Classical private University.
17. Schumpeter, J.A., 2007, The theory of economic development. Capitalism, Socialism
and Democracy. Moscow. Penguin Books.
18. Seligman, B., 1968, Major trends of modern economic thought. Moscow. Progress
Publishers.

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19. Sirko, A.V., 2004, Corporate relations in a transition economy: problems of theory and
practice. Kyiv. Imex.
20. Smith, A., 2001, The wealth of nations. Inquiry into the Nature and Causes of the
Wealth of Nations. Kyiv.: Port-Royal.
21. Suprun, N.A., 2009, Evolution of national corporate governance models. Kyiv. KNEU.
22. Veblen, T., 1984, Theory of the leisure class: an economic study of institutions.
Moscow. Progress Publishers.
23. Williamson, O.E., 2001, The economic institutions of capitalism: Firms, marketing,
contracting. Kyiv. Publishing house «Artek».
24. Zheleznov, V.Y., 1908, Essays on political economy. Moscow. Penguin Books.

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of Economics and Issue 2(18),
Public Administration 2013

IMPACT OF ECONOMIC CRISIS ON WOOD MARKETS


(CONSUMPTION, PRODUCTION AND TRADE)
Lecturer Ph.D. Maria‐Loredana POPESCU
Spiru Haret University, Romania
popesculrdn@yahoo.com

Lecturer Ph.D. Antoniu PREDESCU
Spiru Haret University, Romania
gen3pavo@yahoo.com

Associate Professor Ph.D. Mihaela‐Diana OANCEA‐NEGESCU
The Academy of Economic Studies, Bucharest, Romania
mnegescu@yahoo.com

Abstract:
Global economic crisis represents one of the causes why wood consumption is increasing especially in countries
less developed. In countries where governments couldn’t improve the quality of life and unemployment rate is higher,
local communities devastate a lot of forestry. In last thirty years we saw a deforestation process at the global level
related to land being converted to other uses: agriculture and urbanization, which represent a positive trend of a
negative use. The statistics reveal, on one hand, an increasing demand for paper, paper products, wood products and
wood energy. So this point is important to analyze: where wood came from and where it is going as either raw material
or processed goods? For undeveloped countries, like Romania, it is easy to export primary wood product without
evaluating the consequences. On the other hand, developed countries like Sweden export value added products which
brig them higher value and profits and require greater manufacturing and marketing skills (case IKEA). For this,
government policy could introduce trade barriers to decrease log consumption (like export taxes) and simultaneously
support furniture production and trade (e.g. export).

Key words: wood, furniture, production, deforestation, taxation, crisis.

JEL classification: D24, F13, F53, O18, O53, P25.

INTRODUCTION

Wood markets – and this is a very large ‘world’, since it comprises production, consumption
and trade of lumber and furniture of all imaginable types – have, in Romania, a rather tempestuous
history, between 1990 and 2013. Events took a turn for the worse after 2008, when actual world
economic crisis was felt, for the first time, in Romania, and even today there is, so to speak, water
under the bridge. Nevertheless, it is truly important the impact of (actual) economic crisis on wood
markets, on one side, and on Romanian wood market, on the other side, is surely not the first impact
production, consumption and trade of lumber and furniture had to bear – at least in our country; but
maybe, the last one.

PAPER AND TEXT FORMAT

In 1990 Romanian wood market had, for first time in over 45 years, to behave as if it was,
indeed, a market economy – rather as a ‘first-born’ rather than as an adult one. From this
perspective, if we consider Romanian economy ‘prepared’ itself, from 1990 until 2007, to bear the
brunt of actual economic crisis, analyzing main characteristics of this ‘preparation’, or rather of this
time frame, is a work which yields some important observations.
Firstly, it is worth mentioning the fact forests in Romania were, in the past twenty-three years,
and still are, unfortunately, ‘exploited’ – in fact, savagely torn down. This extremely unfortunate,

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and of course illegal, phenomenon started from January 1st, 1990, and did not let down in a sensible
amplitude ever since.
It is not to say only trees were chopped to bits in Romania, or that Romanian people had
nothing to do with this. Mentalities being what they were, in January 1990 – and beyond –,
mentalities, furthermore, and worse, being what they are even today, in 2013 (with a few
exceptions), not only forests, but Romanian real economy itself began to shrink, in 1990, or more
precise to be demolished, bit by bit.
Point is from 1990 onwards the trend to be recorded was that of a gradual reduction of
exploitable wood mass, and in the same time of a gradual reduction of Romanian real economy. In
what concerns Romanian wood market, it suffered on multiple levels: as real economy both
declined in size and power and changed in structure and goals, number of economic agents working
in wood market declined.
In addition, state-owned firms working in this field, that is all firms, became bankrupt;
private-owned firms appeared fairly quickly, but they were small – and medium – size; as a result,
as elsewhere, and in other times, a process of business concentration, as a large number of firms
proved not able to earn for themselves – and real economy – a profit of sorts. This concentration
had, on the other side, its counterpart: Romanian trade balance was affected, because of this
dynamics.
Lumber production (i.e. softwood lumber) accounted, in Romania, last year (2012), for
approximately 3.3 million cubic meters; this is an output smaller than the output corresponding with
level of maximum capacity, but, in the same time, the result of most normal (in a sense) economic
developments. One of the most important is the fact especially after 2007 prices of resources
(gasoline, spare parts, etc.) rose, whilst utilities’ costs did not remain constant – or idle.
The values concerning lumber production, recorded between 2008 and 2012, are shown in the
following table, in order to illustrate this dynamics:

Table 1. Manufacture of wood (lumbers) in Romania, 2008-2012

Year 2008 2009 2010 2011 2012


Manufacture of wood
(lumbers) (million lei) 8053,6 7410,4 8479,2 9751,08 9720,8

Source: data (extracted from www.insse.ro) processed by authors

Using these values we are able to present the following graph, illustrating evolution of wood
production in Romania, between 2008 and 2012:

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Manufacture of wood (lumbers) in România, 2008-2012 (million


lei)

12000
10000
million lei

8000
6000
4000
2000
0
2008 2009 2010 2011 2012
Year

Graph 1. Manufacture of wood (lumbers) in Romania, 2008-2012

In what furniture is concerned, another problem is average Romanian’s purchasing power –


and this is not a small issue, in spite of all (possible) apparent evidence to the contrary. Until 1990,
in fact, until 1995-1996 purchasing power parity stood at a relatively high level; in other words,
average Romanian was a relatively rich fellow, rich enough, in effect, to be able to buy pieces of
furniture (far) larger than a chair and more expensive than a couple of chairs. In addition,
liberalization occurred also for furniture prices, after 1997: this, in Romania, where ‘liberalization’
seems to mean, almost always, ‘price increase’. Prices of furniture did increase, starting with 1998,
up to 500%.
International competition, in what furniture is concerned, is particularly tough (i.e. IKEA,
sqq.); so, if internal consumption of Romanian furniture dwindled, exports of Romanian furniture
were, and still are, also in a sticky spot. For these reasons, it is no great surprise Romanian wood
market comprises a relatively small furniture sector. And again, it cannot be surprising the picture is
not brighter than it is nowadays, since Romanian state appears simply not willing to give its own
economy a fighting chance, in this case some support (e.g. subsidies and so forth) for boosting both
lumber and furniture production and – in Romania – furniture export.
For this matter, equilibrium was necessary, it was even unavoidable to occur and it did just
that. Whereas a lot of trees are cut in Romania, as we have shown above, this is not to be
transformed into furniture, at least not on Romanian soil. But, all resulting lumber production is
sold as such on foreign markets. This is carried out in a successfully manner, so as to be able to
obtain a reasonable lumber production even in times of economic and financial crisis (e.g. 2008-
2013). The lumber is exported, to be sure, all over the world, that is not only in European Union,
but also in China (relatively considerable quantities).
The amplitude of production of furniture, as this particular production was recorded between
2008 and 2012, is revealed in table below:

Table 2. Manufacture of furniture in Romania, 2008-2012


Year 2008 2009 2010 2011 2012
Manufacture of
furniture (million lei) 6597,5 5721,9 5952,8 5821,8 5804,9

Source: data (extracted from www.insse.ro) processed by authors

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Using these values we are able to present the following graph, illustrating evolution of wood
production in Romania, between 2008 and 2012:

Graph 2. Manufacture of furniture in Romania, 2008-2012

If, therefore, to all intents and purposes, firms comprising Romanian wood market did
relatively well, in the past 23 years, this is mainly the resultant of good business strategy, on one
hand, and of favorable internal and external circumstances, on the other hand.

CONCLUSION

In last years, it is noticeable worldwide an abrupt increase in phenomenon of deforestation,


but especially in less developed countries – due to impact of increased poverty and economic
turmoil, illegal logging and, last but no least, urbanization. This effect – deforestation – is felt,
though, as we have said, in developed countries too, but with different causes, among which we can
pinpoint an ever-increasing demand for both wood (and wood products) and paper (and paper
products).
From this point of view, Romania’s wood market seems, at least, not to have grown to its full
(real) potential, but this tends to be a global issue. That is, all over the world there are moments – if
not periods – when (aggregate) wood and furniture supply is smaller than (aggregate) wood and
furniture demand. There are many a cause behind this situation. On one hand, economic crisis hit
hard both producers and consumers; on the other hand, local communities were hit no less hard, by
the same crisis and also by side effects of deforestation.
A market, in this case a wood market, is as powerful as it ‘wants’ to, that is, as economic
processes carried out inside it are ever more productive, efficient and focused on obtaining highly
processed goods. Romanian wood market is, unfortunately, focused on lumber production, with
some rather typical downturns: Romania exports lumber and imports furniture and paper. All in all,
our wood paper is hardly susceptible to being able to expand itself, or simply to bear the brunt of
another crisis, should it emerge.
Regarding the world, China emerged, for some years now, as a great player on world (wood
and furniture) stage (e.g. largest round wood importer and largest secondary-processed products
exporter). And, still, trade barriers (export taxes, etc.) make havoc on all wood markets, above all
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on their (financial) efficiency.

REFERENCES

1. Atkinson, A.B., Stiglitz, J.E. – “The design of tax structure: direct versus indirect
taxation”, Journal of Public Economics, 6: 55-75, 1976
2. Eatwell, J., Milgate, M., Newman, P. – „The New Palgrave: A Dictionary of
Economics”, The Macmillan Press Limited, 1996
3. Gregory-Mankiw, N., Macroeconomics (7th edition), Worth Publishers, U.S.A., 2009
4. Mendoza, E. G., Razin, A., Tesar, L. L. – “Effective tax rates in Macroeconomics: cross-
country estimates of tax rates on factor incomes and consumption”, Journal of Monetary
Economics, Vol. 34, Issue 3, pp. 297-323, Washington, 1994
5. Pistol, G., Popescu, M. L., “Marketing”, Editura Sitech, Craiova, 2013
6. Predescu, A., “Economie (Microeconomie şi Macroeconomie”, Editura Sitech, Craiova,
2013
7. Schiller, B.R., The Economy Today (9th edition), The McGraw-Hill Companies, Inc.,
New York, 2003
8. Stiglitz Joseph, Walsh, Carl E. – Principles of Microeconomics (3rd Edition), Norton,
W. W. & Company, Inc., 2002
9. *** “Raport privind starea economică şi socială a sectorului de prelucrare a lemnului şi a
mobilei”, Federatia Sindicatelor Libere din Industria Lemnului Romania (FSLIL),
BUCHAREST (17 – 18 March 2008)
10. *** “Global Wood Markets: Consumption, Production and Trade”, International
Forestry and Global Issues 18 May 2010, Nancy, France
11. www.insse.ro
12. www.gov.ro
13. www.mfinante.ro
14. www.unece.org
15. www.faostat.fao.org

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of Economics and Issue 2(18),
Public Administration 2013

THE IMPACT OF CORPORATE SOCIAL RESPONSIBILITY ON


CORPORATE VALUE
Ph.D. student Diana DOBRESCU
Academy of Economic Studies, Faculty of Finance, Insurance, Banking and Stock Exchange, Bucharest, Romania
olimpicdi@yahoo.com

Abstract:
This paper investigates the correlation between Corporate Social Responsability actions and companies’
value. For this purpose a data base was created for 101 important companies in Romania, for years 2011 and 2012.
The data was processed using Eviews 7 and SAS 9.2 softwares and the econometric variables specific determinations
were interpreted in an econometric approach. A new index for the Corporate Social Responsabilitiy hierarchy levels
was proposed and its applicability was demonstrated.

Key words: social responsability, corporate governance, modelling, index.

JEL classification: C38, D22, M14

1. INTRODUCTION

The main purpose of this paper is the analysis of social responsibility actions of the main
corporations doing business in Romania on their value, and mutual each impact these activities have
on various social sectors. As a mean of study a database was created by investigating different
sources of information. First of all the analyzes performed by well known companies in the field of
corporate analysis, like Ernst & Young Romania [4] or BraunPartners Romania [1] were
investigated. Then major romanian sites dedicated to Corporate Social Responsability (CSR)
activities were investigated [14]-[16] and in order to validate and fill up the information materials
developed by companies presenting their activities and results and scientific articles in the field
were investigated.
The main difficulty encountered in data analysis consits in the absence of a standard for data
reporting, data values and also CSR activities results quantification. It can be seen that the actual
objectives for different campaigns, fields or methods for the CSR implementation for the companies
in our country are only present in statistical surveys, having rather a subjective argument, while a
regional and areas of involvement analysis was facilitated by the data presentation approach.

2. STATUS OF KNOWLEDGE

The CSR debate started long time ago, since the middle of last century. Howard Rothmann
Bowen, surnamed „the father of CSR”, written the fundamental book Social Responsibilities of the
Businessman (Bowen, 1953). His work determined a vision change from business towards social
responsibility, defining the new field so that entrepreneurs have the responsibility to orientate and
take their decisions based on the expectations, aims and values of a society.
The 1976 Nobel Prize Laureate in Economics, Milton Friedman ([1970] 2007), starting from
the title of an article published in The New York Times, says: "The social responsibility of business
is to increase profits." According to the economist only people may have different responsibilities,
while a corporation is an artificial entity and in this respect we believe that the responsibilities they
have are all artificial. While the "business" as a whole can not be said to have responsibilities, even
in the slightest sense.
The field has developed in the years before the financial and economic crisis started in 2007
and continues today with the advent of many approaches and theories. Interest in CSR has resulted
in the emergence of new alternatives concepts, like corporate sustainability, compared with CSR by

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van Marrewijk (2003), or corporate citizenship introduced by Matten et al (2003) and Wood and
Lodgson (2002).
An interesting classification of CSR is conducted by Frederick (1987, 1998). It is based on
the transfer of the concept of CSR ethics (which he calls CSR1), the managerial concept of social
responsiveness (CSR2), through the inclusion of normative ethical elements to CSR3 and finally by
considering the role of science and religion specific management issues, the final level is reached
(CSR4). How far are these theories to the CSR practical reality has become evident since the last
decades of the last century, because the American business scholar Dow Votaw wrote as long ago
as 1972 that “corporate social responsibility means something, but not always the same thing to
everybody. CSR, it sometimes seems, is everything and everywhere.” Trying to explain his
judgement he also noted that “To some it conveys the idea of legal responsibility or liability; to
others, it means socially responsible behavior in the ethical sense; to still others, the meaning
transmitted is that of ‘responsible for’ in a causal mode; many simply equate it with a charitable
contribution; some take it to mean socially conscious; many of those who embrace it most fervently
see it as a mere synonym for legitimacy in the context of belonging or being proper or valid; a few
see a sort of fiduciary duty imposing higher standards of behavior on businessmen than on citizens
at large” (Votaw, 1972, p. 25). [13]
Recent developments in theory and especially in practice CSR is reflected in the work of
Romanian researchers. In this respect Iamandi (2012) analyzes the communication of CSR in
Romania, in terms of transparency and participation according to reviewed EC Strategy 2011-2014
for Corporate Social Responsibility documents, developed by the European Commission in October
2011. These documents reflect emerging economic and social conditions in EU countries after the
crisis. Among the major directions of action highlights two of them, reffering to the
communication, namely: increasing the visibility of CSR and disseminating good practices,
improving corporate disclosure information relating to society and environment. Obrad et al. (2011)
examines the perception and reality in terms of CSR in Romanian multinational companies since
2000, entering the autochthonous business environment have taken the strategies and applied the
CSR principles in their home countries, leading to CSR practices that can guide the rest of the
companies in our country. Băleanu et al. (2011) look on the CSR practices of the most valuable
companies in Romania, as well as their beneficiaries. The analysis includes the top 100 companies
ranked by Ziarul Financiar (ZF English). One of the most important conclusion is that 49% of
surveyed companies are engaged in CSR activities, this percentage being considered high by the
authors. Another conclusion is that the vision they have on CSR is focused exclusively on the
business and competitive advantages arising from CSR activity. It appears that CSR favorite tools
used by companies are inexpensive and turn out poorly coordinated with other social and political
actors [1]. Cocriş et al. (2009, 2011) focuses on the CSR activities in the banking sector, making an
analysis of sustainability. Social responsibility is seen in the light of ensuring financial stability and
therefore social welfare for the population. It’s a view that a decade ago seemed implicit, but in the
current crisis, together with the globalization process, determines the authorities to consider as a
priority the stability of financial markets, the financial intermediation and financial infrastructure.

3. THE CURRENT CSR CONTEXT IN ROMANIA

The way to report corporate social responsability activities has evolved over the years,
currently being available objective data and surveys for 34 countries, including 16 activity sectors.
[6]. For the evaluation and comparison of data was prepared by KPMG, a model that includes
information systems and processes, ensuring the scope and the reached level, redeclaration, multiple
channels of communication, using the highest standards proposed by the GRI (Global Reporting
Initiative), as well as integrated reports. The analysis results are represented by a graph into four
quadrants, having the communication quality as the ordinate and the process maturity level as the
abscissa. Corporate reporting quadrants show illustrative positions for each country, based on data

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supplied only by the companies that publish a progress report to evaluate corporate social
responsability.
As shown in the graph (figure no. 1), conducted by KPMG, the company's position in our
country is in quadrant three, in the category of companies that have a late start in CSR. To date,
CSR activities regarding the implementation and communication of CSR efforts and achievements
are low. Companies tend to report on a single media channel and do not show significant results in
terms of the growing maturity of their information systems and processes. These issues show that
romanian companies have not yet implemented systems and information processes at leaders’
similar level. International regulations in the field have evolved simultaneously with the evaluation
techniques and standards. According to the European Parliament resolution of 6 February 2013 on
corporate social responsibility: promoting the interests of society and a path to a sustainable
economic recovery and comprehensive investor community, lately there has been a significant
change in vision. This is justified by the fact that a number of 1123 investors managing assets of
over U.S. $ 32 trillion approved the UN Principles for Responsible Investment (UNPRI) and at the
European Forum on sustainable investments has been estimated that the global market for socially
responsible investments reached approximately 7 trillion Euros in September 2010. A total of 82
investors, having Aviva Global Investors as leader, and managing assets totaling U.S. $ 50 trillion
requested the UN Summit on sustainable development that reporting on businesses sustainability to
become mandatory. [5]
In the chapter dedicated to establish a correlation between socially responsible investments
and disclosure, in paragraph 69, the Commission notes that "one of the driving force determining
the role of a responsible investment market in terms of social responsability and sustainability it is
further institutional investor demand, but believes that the primary focus should not be limited to
environmental issues, notes, in this regard, that disclosure to investors and consumers is an
important driving force determining the role of CSR and must be based on social and environmental
principles easily applied and measured.”

Figure 1. CSR position graph for countries with significant activity in the area, according to
KPMG, International Survey of Corporate Responsibility – Reporting 2011 [7].

CSR Rating 24/7, developed by B&P Brandivia, for activity fields, for a group of 25 major
companies in Romania evaluates companies through the following seven areas:
1. Transparency;
2. Corporate Governance;
3. Relationship with Related Parties;
4. Responsibility towards the environment;
5. Economic responsibility;
6. Responsibility to society;
7. Responsibility for human resources.

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Romanian companies' CSR results show poor performance in communicating environmental


responsibility (eg management and measurement of environmental impact) and communication of
HR practices (eg the existence of atypical forms of employment such as part time or flexible
working). Of the 25 companies studied, only 7 have published a CSR or environmental report in the
last two years, while only 7 companies’ websites include a detailed and easily accessible CSR /
Sustainability section. The average CSR Index 24/7 also developed by B & P Brandivia for
different activity fields shows that the Telecom and Financial sectors are more envolved in the CSR
activities having a high index, while the commerce has a much lower index. [2]

4. METHODOLOGY AND DATABASE USED IN QUANTITATIVE ANALYSIS

Using information from several reports: Ernst & Young Romania: “Major Companies in
Romania, 2012 Edition”, B&P Brandivia: “CSR 24/7 Rating 2010 Romania”, from webpages
specialized in CSR: www.responsabilitatesociala.ro, www.csrmedia.ro or belonging to romanian
companies, a database contaning variables for 101 main companies from national market was
constructed. The analized period was the years 2011-2012.
Unifactorial and multifactorial regression analysis in Eviews 7 econometric software were
used for data processing.
Companies’ selection was firstly made considering the position in major firm’s top in
Romania and afterwards by turnover size, profit and number of employees criteria. From a larger
range of companies were choosen those for which sufficient information regarding the
quantification of CSR activity existed.
The used econometic variables, their symbol and computation description is shown as
follows (table no. 1).

Table 1. Variables used in the model


Variabile Symbol Description
Major company index MCRSCOR An index developed by Ernst & Young based on the market
parameters for companies in Romania, with the purpose of
creating a hierarchy. Values range from 1 to 5.
Annual turnover CA Turnover for year 2011 2011 (RON)

Profit/Loss PROFIT Companies’ profit or loss from the financial documents in 2011
(RON)
Number of employees ANGAJAŢI Average number of employees in 2011
CSR 24/7 Index BPINDICE The value of the B&P Brandivia CSR 24/7 index, ranging from 0
to 100.
CSR actions in the education EDUCATIE DUMMY variable, which equals 0, if the company made no CSR
field actions in the education field, or equals 1 if it made.

CSR actions in the culture CULTURA DUMMY variable, which equals 0, if the company made no CSR
field actions in culture field, or equals 1 if it made.t.

CSR actions in the MEDIU DUMMY variable, which equals 0, if the company made no CSR
environment protection field actions in the environment protection field, or equals 1 if it made.

CSR actions in the social SOCIAL DUMMY variable, which equals 0, if the company made no CSR
field actions in the social field, or equals 1 if it made.

CSR actions in the health SANATATE DUMMY variable, which equals 0, if the company made no CSR
protection field actions in the health protection field, or equals 1 if it made.

CSR actions in the sport field SPORT DUMMY variable, which equals 0, if the company made no CSR
actions in the sport field, or equals 1 if it made.
CSR Index CSR Cumulates the 6 CSR action fields stated above, with values
ranging from 0 to 6.

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5. THE ECONOMETRIC MODEL


5.1. RESULTS FOR THE ECONOMETRIC ANALYSIS

In order to study the relationships between companies’ value and reported CSR actions,
considering also the aspects regarding the endogenity between the major company index and CSR
indexes, several regressions were performed.
For the first and second multifactorial analysis having MCRSCOR as a dependent variable,
the results are presented in table no. 2 and tabel no.3, respectively.

Table 2. First multifactorial analysis having MCRSCOR as a dependent variable


Dependent Variable: MCRSCOR
Method: Least Squares
Sample (adjusted): 1 99
Included observations: 99 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

C 3.644254 0.092168 39.53915 0.0000


EDUCATIE -0.793677 0.156616 -5.067654 0.0000
CULTURA -0.369680 0.217366 -1.700729 0.0924
MEDIU 0.085801 0.154346 0.555900 0.5796
SOCIAL 0.108654 0.160955 0.675059 0.5013
SANATATE 0.054104 0.195235 0.277123 0.7823
SPORT 0.718597 0.227152 3.163505 0.0021

R-squared 0.290445 Mean dependent var 3.412111


Adjusted R-squared 0.244170 S.D. dependent var 0.707130
S.E. of regression 0.614768 Akaike info criterion 1.932939
Sum squared resid 34.77043 Schwarz criterion 2.116432
Log likelihood -88.68047 Hannan-Quinn criter. 2.007180
F-statistic 6.276460 Durbin-Watson stat 0.900593
Prob(F-statistic) 0.000015

Table 3. Second multifactorial analysis having MCRSCOR as a dependent variable


Dependent Variable: MCRSCOR
Method: Least Squares
Sample (adjusted): 1 99
Included observations: 99 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

C 3.467896 0.091156 38.04335 0.0000


CSR -0.094244 0.036710 -2.567299 0.0118
BPINDICE 0.024542 0.005663 4.334030 0.0000

R-squared 0.181929 Mean dependent var 3.412111


Adjusted R-squared 0.164886 S.D. dependent var 0.707130
S.E. of regression 0.646207 Akaike info criterion 1.994442
Sum squared resid 40.08805 Schwarz criterion 2.073082
Log likelihood -95.72486 Hannan-Quinn criter. 2.026259
F-statistic 10.67464 Durbin-Watson stat 1.320320
Prob(F-statistic) 0.000065

The output file contains R-squared coefficients with small values: 29% and 18%. This
shows that an important percentage of the MCRSCOR value is determined by factors that were not
included in the model and that the correlation between variables is weak.
For establishing if the parameters are significant the p-value must be taken into
consideretion. If the p-value is very small the error made by rejecting the null hypothesis (“the

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parameter is statistically insignificant) is also small and if the p-value is great the null hypothesis
will be accepted. The same result can be obtained by using the Fisher test analysis.
MCRSCOR is determined in a very small proportion by CSR indexes and moreover, in the
CSR global index with takes into consideration the 6 CSR fields, a reverse (negative) correlation
appears.
In the next multifactorial analysis the dependent variable is BPINDICE and the results are
shown in table no. 4.

Table 4. Multifactorial analysis having BPINDICE as the dependent variable


Dependent Variable: BPINDICE
Method: Least Squares
Sample (adjusted): 1 99
Included observations: 99 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

C -2.962382 4.045454 -0.732274 0.4658


CA 6.21E-10 8.44E-11 7.353880 0.0000
PROFIT 1.43E-08 1.93E-09 7.409274 0.0000
MCRSCOR 0.995825 1.199913 0.829915 0.4087

R-squared 0.592374 Mean dependent var 4.515152


Adjusted R-squared 0.579501 S.D. dependent var 11.85401
S.E. of regression 7.686837 Akaike info criterion 6.956461
Sum squared resid 5613.309 Schwarz criterion 7.061314
Log likelihood -340.3448 Hannan-Quinn criter. 6.998885
F-statistic 46.01889 Durbin-Watson stat 2.033399
Prob(F-statistic) 0.000000

In this case the R-squared coefficient is 59% meaning that BPINDICE’s value is mostly
determined by the included factors, and the CSR activity is mostly influenced by financial strength
and position and not the otherway. The conclusion is that CSR activities don’t guarantee or
facilitate the ascent to a higher value and position for the corporation.
An aditional unifactorial analysis regression was estimated having BPINDICE as dependent
variable in order to study the influence of the employes number over the index. The results are
presented in table no. 5.
R-squared value is around 49.6% which suggests that BPINDICE is highly influenced by the
companie’s average number of employees. The CSR activity is eased and facilitated within the
companies having many employees.

Table 5. Unifactorial analysis for the influence of the employees number over the index
Dependent Variable: BPINDICE
Method: Least Squares
Sample (adjusted): 1 99
Included observations: 87 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

C -1.680082 1.054887 -1.592666 0.1149


ANGAJATI 0.002478 0.000271 9.140554 0.0000

R-squared 0.495698 Mean dependent var 3.919540


Adjusted R-squared 0.489765 S.D. dependent var 11.21380
S.E. of regression 8.010100 Akaike info criterion 7.022004
Sum squared resid 5453.745 Schwarz criterion 7.078691
Log likelihood -303.4572 Hannan-Quinn criter. 7.044830
F-statistic 83.54972 Durbin-Watson stat 1.498618
Prob(F-statistic) 0.000000

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5.2. PRINCIPAL COMPONENTS AND CLUSTER ANALYSIS

For this study after testing only 6 out of 12 variables were retained, the ones with higher
significance: MCRSCOR, CA, PROFIT, ANGAJATI, BPINDICE and CSR.
This technique consists of new variables determination, also known as principal
components, computed as linear combinations of the original variables, having maximum variance
and thus retainig the maximum possible information. A small number of new variables are obtained
(usually 2-4), not correlated one with another.
Before the analysis is made, the variables should be standardized. This process consist in the
substitution of each observation’s value with the ratio between its centered value and standard
deviation. The result of PRINCOMP procedure is obtained using SAS 9.2 software and is shown in
table no. 6. In order to find the optimal number of principal components in the analysis the Kaiser
criterion it is used. Subsequently this number is determined by the cumulated proportion of
information (variance) which should exceed 76%. In the case of the current analysis 3 principal
components are retained.
The first one takes 54,58% of the initial variance, the second one 20,1%, and the third one
10,82%, giving a total of 85,51%. In the analysis, the „scores” (observations for the 3 principal
components) will replace the observations for the initial 6 variables.

Table 6
Eigenvalues of the Correlation Matrix

Eigenvalue Difference Proportion Cumulative

1 3.27494015 2.06877429 0.5458 0.5458

2 1.20616586 0.55676646 0.2010 0.7469

3 0.64939940 0.25065497 0.1082 0.8551

4 0.39874443 0.09635176 0.0665 0.9215

5 0.30239267 0.13403519 0.0504 0.9719

6 0.16835748 0.0281 1.0000

Graphs shown in figures below suggest the grouping of the variables as a function of the
principal components, namely the new variables coordinates given by the principal components
axes. The first 2 components are represented in figure no. 2. As it can be noticed, BPINDICE,
PROFIT, ANGAJATI and CA are close to the second component axis, the rest of the variables
being scattered.

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Figure 2. Image of the first and the second principal components after aplying Kaiser
criterion

When representing the variables as functions of components 1 and 3, it can be noticed that
CSR, MCRSCOR are closer to the component 1 but the most relevant vairables for companies’
classification remain BPINDICE, ANGAJAŢI and PROFIT (figure no. 3).

Figure 3. Image of the first and the third principal components after aplying Kaiser criterion

Finally, in the case of representing the variables as functions of the component 2 and 3 (figure
no. 4), it can be noticed that all the variables are more scattered around the two axes.

Figure 4. Image of the second and the third principal components after aplying Kaiser
criterion

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All the three principal components reflect the fact that MCRSCOR and CA (showing the
financial position and market strenght) won’t be influenced significantly by the other variables.
In order to group the companies in classes, cluster analysis will be used. The general
classification criterion should assure a minimum variability in the clases and a maximum variability
between the classes. The Ward method evaluates the distance between 2 clusters as a sum of the
squares of objects standard deviations in a configuration made by bringing together the 2 clusters.
The Dendogram is the graph that highlights clusters’ structure, componence and agregation levels.
Using this tool it can be decided upon the optimal number of classes retained into the analysis,
through the apparition of gaps. By performing several cuts in the dendogram (figure no. 8), different
levels oh hierarchy will be obtained. As R2 reaches 1 the number of clusters rises. When advancing
in the cut several classes shall be obtained and the grouping of companies can be better observed. A
gap is presented in figure no. 5 with a coloured line intersecting the dendogram in 4 points, which
reflects the formation of 4 clusters.

Figure 5. Cluster analysis Dendogram

The clusters grouping representation for the companies is shown in figure no. 6.

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Figure 6. Representation of the companies grouping into clusters

The majority of the observations are grouped into the first 2 clusters. Cluster 4 (containing
only PETROM company) includes those observations with the highest values for all the variables
(financial and CSR) and cluster 3, holding DACIA, ORANGE, VODAFONE, ROMPETROL,
ROMGAZ, DEDEMAN, represents the group of companies with very good financial indicators,
value and position on the market which also have many CSR actions. Companies from cluster 2
have high financial and market strenght indicators but don’t undertake CSR activities, the CSR
index does not influence their value. Cluster 1, including TERAPLAST, ALEXANDRION,
HOLCIM, LA FANTANA, COSMOTE, SIVECO, GSK, DHL, AVON, APA NOVA is the most
interesting because these companies have a very good image regarding CSR without having the
benefit of as many resources as the other firms in the study.

6. CONCLUSIONS

This paper presents an econometric analysis of CSR actions’ influence over the value of
major companies in Romania but also, reciprocally, the impact of CSR activities on different social
sectors firms’ values. The research was realized using a database containg 101 strong companies on
the national market during 2011-2012. Unifactorial and multifactorial regressions in Eviews 7 were
used for processing data. Main conclusions are that CSR activity is partially influenced by financial
strenght, market position and value for a company, and not the otherway and secondly the fact that
CSR activity is facilitated at companies having a larger number of employees. Another analysis was
made using SAS 9.2 software having as main results the determination of 3 principal components
which can synthesize a big part of the information corresponding to the 6 initial variables and also
the posibility of grouping the companies in 4 clusters holding observations, in terms of value and
CSR activity.

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REFERENCES

1. Băleanu T.E., Chelcea L., Stancu A. (2011), “The Social Responsibility of the Top 100
Romanian Companies. An Analysis of Corporate Websites”, Amfiteatru Economic, Vol.
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2. B&P Brandivia (2010), “CSR 24/7 Rating 2010 Romania”, /www.braunpartners.ro/;
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4. Ernst & Young Romania (2012), “Major Companies in Romania, 2012 Edition”,
doingbusiness.ro;
5. European Parliament resolution of 6 February 2013 on corporate social responsibility:
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recovery (2012/2097(INI));
6. Iamandi I.E. (2012), “Empirical Analysis on CSR Communication in Romania:
Transparency and Participation”, The Romanian Economic Journal, XV, no. 46, December
2012;
7. KPMG (2012), “International Survey of Corporate Responsibility – Reporting 2011”;
8. Moscalu M., Vintila G. (2011), “Study Regarding the Determinants of Corporate Social
Performance for a Sample of Romanian Listed Companies”, Metalurgia International, 17, 3,
pp. 243-251;
9. Moscalu M., Vintila G. (2012), “The assessment of corporate social risk in a Romanian
context”, Procedia - Social and Behavioral Sciences 62, p. 571 – 575;
10. Obrad C., Petcu D., Gherheş V., Suciu S. (2011), “Corporate Social Resposability in
Romanian Companies – between perceptions and reality”, Amfiteatru Economic, Vol. XIII ,
No. 29, February 2011;
11. Vintilă G. (2009), “Fiscal management of the enterprise”, course support (in romanian),
Finance, Insurance, Banking and Stock Exchange Faculty;
12. Voineagu V., Ţiţan E., Şerban R., Ghiţă S., Todose D., Boboc C., Pele D. (2009),
“Econometrics Theory and Practice” (in romanian), second edition, Meteor Press,
Bucharest;
13. Votaw D. (1972), “Genius Became Rare: A Comment on the Doctrine of Social
Responsibility, Pt. 1”, California Management Review 15(2), 25–31;
14. www.csrmedia.ro/;
15. www.globalreporting.org/resourcelibrary/G3.1-Guidelines-Incl-TechnicalProtocol.pdf
16. www.responsabilitatesociala.ro/.

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STUDY ABOUT STUDENTS’ ENTREPRENEURSHIP SPIRIT


Economist Elena ZAMCU
Chamber of Commerce and Industry, Suceava, Romania
elenazamcu@yahoo.com

Abstract:
What is entrepreneurship and how a students’ organization can help to develop it? To be innovative, to assume
some risks is not enough. Establishing and managing a business requires, first of all, a labor intensive and sustained
information, organization, planning and coordination of complex and diverse activities. All this things can be learnt at
university and practiced in a student’s organization. CASt (Students’ Entrepreneurship Club) aims is to create an
entrepreneurship community with a modern business vision, using professional management methods, adapted to the
present Romanian realities. Another interesting aspect presented in my study is a new concept in Romania – business
angels. Who are they? How important are they for the economy? How can they help a young entrepreneur? What kinds
of business will them financing?In conclusion, I show how the knowledge from University together with the experience
and the knowhow from CASt can help young people to start their own business. In this organization there are successful
businesses, evidence that the main goal of CASt was reached.

Key words: entrepreneur, student’s organization, entrepreneurial spirit, business angel, NGO,

JEL classification: D71, L26, L31

INTRODUCTION

Everybody wants to be its own boss, to work for achieving the personal goals and to be
financial independent. The most of the people are intimidated by bureaucratic aspects or emotional
and prefer to be employed in a company. Other ones prefer to start their own businesses because
they have entrepreneurial spirit. Entrepreneurial spirit is a giant force, with a great impact in
develop and progress of the society by innovation, creating jobs and social responsibility. (
http://www.weforum.org/en/initiatives/gei/EntrepreneurshipEducation/index.htm)

1. THEORETICAL INFORMATION ABOUT ENTREPRENEURSHIP


1.1. THE CONCEPT AND DEFINITION OF ENTREPRENEURSHIP

Entrepreneurship started to be known in time of Ludwig of XIVth reign. He used to say that
“bourgeoisies and artisans will become wealth creators”
(http://ro.wikipedia.org/wiki/Antreprenoriat). In time, entrepreneurship received a lot of other
definitions: “person with the ability of organize the resources and create something new”
(Schumpeter, 1934), “the entrepreneur is active and orientated to profit” (McClelland, 1961), or, in
Stevenson’s vision “an entrepreneur has the ability to identify and develop business opportunities”.
In literature, the definitions are different because of the historical period. The classic’s like
Richard Cantillon or Jean-Baptiste Say support that entrepreneurs have their own businesses and
they are responsible for all the exchanges form Economy. Jean-Baptiste Say brings something new
and he is the first economist who gives entrepreneurs the role of manager and he considers that
“applying know-how to create products for human consumption” represent the purpose of the
entrepreneurship. About the entrepreneur like manager, the same author say that entrepreneurs
have, in companies, key roles, they coordinate, lead or manage, but they do and specific activities.
In this way they provide capital.
Alfred Marshall, the neoclassicism representative, show another side of the entrepreneur:
innovation and progress. “Business people started the new ways and create benefits for the society
much higher that their own profits” (Văduva, Sebastian, „Antreprenoriatul. Practici aplicative în
România şi în alte ţări în tranziţie”, Ed. Economică, Bucureşti 2004, pg 13-20).

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In modern sense of economy, an entrepreneur is an economic agent who adopt an active and
innovative behavior, who accept financial risks for develop new projects. Because of that, many
societies recognize and promote entrepreneurs and entrepreneurship because of the role in national
and global economy, because of the influence of macroeconomics indicators and the entrepreneurs
are known as “persons that work for themselves” (Bates).

1.2. ENTREPRENEUR: BECOME OR BORN

Some of the characteristics of an entrepreneur are: good organizer, orientated to profit,


responsible, professional, innovative. Now we can ask: Everybody can be an entrepreneur? This can
be learnt? Have to be born with this? It is a talent? From my point of view, everybody can’t be an
entrepreneur, you can learn economy, psychology, or any other useful information, but
performance, ambition, risk taking are specific just for some of us.
The success in businesses doesn’t have a recipe! It depends on so many things, things that
there are or not under our control. Although, there are some characteristics in common for all the
entrepreneurs. Some of them are:
Independent spirit – is one of the most important qualities that an entrepreneur has. An
entrepreneur never feels accomplished in a company were new ideas are not appreciated, where
he/she can’t apply those ideas, an entrepreneur want to be its own boss, to take risks and higher
responsibilities.
Courage - courage to implement the ideas, to follow them, to believe, to realize the difference.
Sometime, all of us have brilliant ideas, but very few of us have the courage to assume and follow
them, and for the other ones those ideas never become true.
Professionalism - know-how has to be complex. An entrepreneur has to know the economical
environment, strategic management, human resource management, marketing, financial
management. In that way, the chances to succeed are bigger.
Social active – an entrepreneur will be implicated not just in economical life, but it will be active in
social domain, too. It will know to give back those who helped it, it will support the unluckiest
ones, will encourage capable youth, will share from its experience.

1.3. ROMANIAN ENTREPRENEUR

In Romania, entrepreneurship appeared after 1989 by practicing trade. After that appeared
entrepreneurs, but they were associated with quick enrichment by more or less legal methods. The
difference between transition economy and market economy is transparency (Forbes România ,
octombrie 2009, pg 377).
CEBR Romania (Centre for Entrepreneurship & Business Research) realized a study in 2009
on 1449 persons for identify and present demographical and social-cultural factors of entrepreneurs.
The results show that 9.58% of the women are involved in an independent activity and 16.75% of
the men. The medium age of that who is entrepreneur is between 33 and 35 years. The new
entrepreneurs have between 26 and 40 years (18.14%). 38,60% of them have a model in their
families, in most cases the father. About the motivation for involving in entrepreneurial activities,
the results indicate that desire to improve the quality of life, desire to be independent are the most
mentioned.

1.4. BUSINESS ANGEL – YOUNG’S „ANGEL” WITH BRILLIANT IDEAS

Business-angel concept is similar with joint-venture financing. In both cases, the investors
bring the money in business with the entrepreneur (or group of entrepreneurs). Chosen business has
premises to be successful ones, but it hasn’t initial financing. A business-angel can assure this
money and he has a similar profit with the entrepreneur, in this way he become a serial
entrepreneur.

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Normally, business-angel investment are value limited, the business financed in this way
don’t need a very large capital. This characteristic exclude from beginning industry businesses,
appropriate business-angel investments are those in trade and services domain.
A business-angel invests in a business in another way that a found does, he is involved in
business strategy. From that point of view, for young with brilliant ideas it is a great advantage
because most of the time they haven’t enough experience, being at the start of o business life.
Sometimes, the business-angel is perceived us a intruder and he aspects to be appreciated by the
entrepreneur (http://www.startups.ro/analize/bani-de-la-ingeri-pentru-afacerile-care-fac-primii-
pasi).
One of the Romanian most known business-angel is Marius Ghenea. He financed tens of
ideas. One of them is an innovative promoting way – advertising mirror. It is a first for national
market and the total investment was 100000 euro, Marius Ghenea holds 60% (Forbes România,
octombrie 2009, pg 284).
There is a web site, www.bizangels.ro, which is the main service in Romania where
investors meet entrepreneurs. In this way it is promoted business-angel idea and the communication
between motivated entrepreneurs and experienced investors is facilitated
(http://www.bizangels.ro/).

2. STUDY CASE ON CAST - STUDENTS’ ENTREPRENEURSHIP CLUB


2.1. FROM IDEA TO ACHIEVEMENT. THE HISTORY OF THE ORGANIZATION

The idea started from “Development and promoting of students’ and graduated
entrepreneurship behavior from Bukovina” project. The goal was to develop entrepreneurships
abilities to students and graduated by promoting a training system which facilitates young’s
mobility from education system to labor market. The result of the main goal was to create a NGO
for development of young’s entrepreneurship abilities.
From the begun the purpose was to add value in students’ education, to develop some
abilities: entrepreneurship and leadership. The purpose of CASt was to create a community of
young people with a modern vision about initiating and conducting a business using modern
methods of management according to the Romanian market.
The activities of the organization was various from organizing training, contests with
economical themes, meetings with known and successful entrepreneurs to representative actions of
students or charity events.
Always the organization relied on members’ improvement, on their desire to develop, to
work in a dynamic team. In exchange, they receive knowledge about business, a value experience to
add in their CVs, trainings, possibility to work with businessmen, to volunteer or to participate to
internships.
CASt develops and from the beginning to now begun one of the most active organization
from “Stefan cel Mare” University.

2.2. HUMAN RESOURCES IN ORGANIZATION

Literature identifies some necessary factors for proper functioning of every business. One of
this is human resource management. In a NGO is perfect applicable this aspect, but is much difficult
to apply because of the motivational factor.
“Non-profit organizations aren’t companies, so they have to be lead in a different way.[…]
They need a severe leadership, not weaker, just because they don’t have financial motivation. They
have to learn how to keep the volunteers whose satisfaction is measured by responsibility and
achievements, not by money.” (Druker, Peter F., „Managementul viitorului”, Ed. ASAB, Bucureşti
2004, pg 112)
CASt members are students of “Stefan cel Mare” University and the process of recruiting is
made every year, to the begun of the university year.

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2.3. TODAY STUDENTS, TOMORROW BUSINESSMEN!

Following the motto “Today students, tomorrow businessmen!” some of the CASt’s
activities are:
● “TOP PEOPLE” – the project wants to improve cooperation relationships between
academic environment and economic’s one by an open discussion where students and businessmen
participate. The topics are various: start-up in business, how to succeed, news in business, choosing
a job, develops a successful career, real opportunities on local market and so on. Among the guests
are representative of: National Bank of Romania – Elena Sireteanu, BRD Suceava – Monica
Vornicu, Intermedia TV Suceava – Catalina Solovastru, Impact FM Suceava – Loredana Vizeteu
(top employees), Dan Alexandrescu – Alexandria Libraries, Stefan Puscasu – Bethesda Private
Hospital, Marius Paslariu – Boem Pub “La Fierarie”, Vasiler Armenean – Betty Ice, Celestin
Avasiloaie – Celestin Typography, Ioan Iftode – Trust Orizont Suceava, Lucian Poenari –
Handmade pens (top entrepreneurs).
● “Young entrepreneur guide” – because some of us want to start its own business CASt
edited this guide which offers information about companies, business plans or other detail for well
function of the start-up.
● “Do you have courage to make money?” – Training organized in Entrepreneurship Global
Week for students who want to open a business.
● TAB Project (Young Entrepreneurs in Bukovina), founded from PHARE CBC
2006/018.449, 3rd priority – People to people, measure 3.1. – Common found of little projects. This
project represented cooperation between CASt, „Ştefan cel Mare” University of Suceava,
Bukovinian State Institute of Finance and Economy and Regional Organization from Chernovtsy
“Young’s Scientifically Society”. The budget of the project was 49394 euro.
The period of the project was 8 mounts, started in December 2009 and the main goal was
improving cross border cooperation in business domain by developing entrepreneurial abilities to
the young people from Romania and Ukraine. Specific objectives were:
- promoting entrepreneurship and entrepreneurial culture in cross border area;
- training for 18 young people and providing them start-up opportunities;
- develop and financing a business – business plan;
- providing consultancy to another 18 young people in realizes a business plan;
- identify opportunities to cooperate with another young people from Romania or Ukraine;
- improving the flow of information between young people and organizations who support
entrepreneurship in cross border area.
The target group contains 36 young people, 20 from Romania, Suceava County, and another
16 from Ukraine, Chernovtsy oblast. They were students or graduate persons who want to deepen
the knowledge from university studies, to develop their entrepreneurial abilities and to start their
own business. The final beneficiaries of this project are Romanian and Ukrainian communities,
where young people will implement their entrepreneurial activities and where will practice their
knowledge and abilities.
The main activities of the project were:
- Project management;
- Promoting the project;
- Selection of the participants;
- Study visit in Ukraine;
- Trainings “Start-up in business”, “Leadership and management develop”, “Communication
and negotiation in business”;
- Workshop “Writing a business plan”;
- Seminar “Entrepreneurship in Bukovina”;
- promoting the entrepreneurship and entrepreneurial culture in Bukovina
The results were the expected ones:

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- 36 young entrepreneurs able to lead, in future, their own business in cross border area; - 5
business plans written;
- 1 start-up;
- 1 web site for the project with information about entrepreneurship;
- 1 forum organized for exchanging ideas and identifies business opportunities;
- promoting materials of the project and of the entrepreneurship;
- 1 exchange contact with young people interested by entrepreneurship;
- 200 persons informed by Bukovinian entrepreneurship.

2.4. DREAMS BECOME REALITY

To show that CASt, as an organization aimed to encourage young people to become


entrepreneurs, reached its goal, I can mention some of the members who apply the knowledge and
now they are entrepreneurs. Two of them have an advertising agency – Amprent Media, another
one has a company of consultancy and management of projects – Vertical Management. Lucian
Poenari products handmade pens, another one sold his ideas and now one of the most original and
innovative pubs form Suceava is his.

3. CONCLUSIONS

Entrepreneur sees in his company the possibility of showing and growing his own
personality. In this way, the new company will reflect the enthusiasm and the qualities of the
entrepreneur, but much important, the gaps of him.
In this study I wanted to show some specific elements of entrepreneurship applied to “Stefan
cel Mare” University’s students. As a conclusion, I am convinced that “Stefan cel Mare” University
together with CASt (Students’ Entrepreneurship Club) are like an informal business incubator.
According to the author Ovidiu Nicolescu, a business incubator is a economical instrument of
development, created for accelerate growth and success of the companies.
The main purpose of a business incubator in Bukovina area is to produce successful
companies what will address national programs, financially viable. Business incubators have
important role: “father” by sustaining companies’ managers, “environment” by supporting
strategies for grow, “investors” by financial help provide incubated companies. Not least, the
business incubator is “business club” facilitating the meetings between entrepreneur and market.

BIBLIOGRAPHY:

1. Brown Carolyn, „Curriculum for Entrepreneureship Education”, A Review, CELCEE


2. Burciu Aurel, Prelipcean Gabriela, Bostan Ionel, „Introducere în management”, Ed.
Economică, Bucureşti 2008
3. Druker Peter F., „Inovaţia şi sistemul antreprenorial”, Ed. Enciclopedică, Bucureşti 1993
4. Druker,Peter F. „Managementul viitorului”, Ed. ASAB, Bucureşti 2004
5. Năstase Carmen, Bîrsan Mihaela, Nedelea Alexandru, „Ghid de formare antreprenorială”,
Ed. Didactică şi Pedagogică, Bucureşti 2006
6. Nicolescu Ovidiu, Nicolescu Ciprian, „Intraprenoriatul şi managementul firmelor mici şi
mijlocii: concepte, abordări, studii de caz”, Ed. Economică 2008
7. Văduva Sebastian, „Antreprenoriatul-Elemente fundamentale globale”, Ed. Economică,
Bucureşti, 2006
8. Văduva Sebastian, „Antreprenoriatul. Practici aplicative în România şi alte ţări în tranziţie”,
Ed. Economică, Bucureşti 2004
9. *** Forbes România, octombrie 2009
10. www.animmc.ro
11. www.bizangels.ro

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12. www.sturtups.ro
13. www.tineriantreprenori.ro
14. www.wikipwdia.ro
15. www.weforum.org

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SECTION 2

MANAGEMENT AND BUSINESS


ADMINISTRATION

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STRATEGIC INTELLIGENCE ROLE IN THE MANAGEMENT OF


ORGANIZATIONS

Professor Ph.D. Ioan PETRIŞOR


West University of Timişoara, Faculty of Economics and Business Administration, Timişoara, Romania
ipetrisor53@yahoo.fr

Ph.D. Student Natalia Ana STRĂIN (SILAŞ)
West University of Timişoara, Faculty of Economics and Business Administration, Timişoara, Romania
natioana@yahoo.com

Abstract:
In the 19th and 20th centuries, intelligence has evolved to a form that can be recognized in the context of
current practice. Unfortunately, many observers misunderstand intelligence. The concepts of critical analysis and
intelligence are often confused, as if they were part of the same activity. Intelligence and analysis are a broader process
of problem solving, involving data collection and analysis, interpretation, speculative considerations on future
developments, patterns, threats, risks and opportunities. Strategic intelligence analysis can be considered as a
particular form of research that deals with any problem at the level of comprehensiveness and detail required to
describe the threats, risks and opportunities, in a useful way for the development of programs and policies. Strategic
intelligence is not a new form of analytic practice, having a tradition of more than two millennia. However, its
acceptance within the modern practice is relatively recent, and its development is, even now, in the 21st century, slow
and uneven.

Key words: strategic intelligence, intelligence cycle, organization management, decision-making process,
operational intelligence, tactical intelligence.

JEL classification: L26, M14.

1. BASIC CONCEPTS OF STRATEGIC INTELLIGENCE

The word "intelligence" is usually used in various contexts, but beyond the intellect
involvement, it outlines two quite different meanings:
 Intelligence can describe both a process and an activity; thus, we can speak of an
"information activity";
 On the other hand, intelligence is used to reveal the final product of that process. In other
words, we can talk about "development", "possession" or "production" of intelligence.
Perhaps we should try to define the concept. Simply said, intelligence can be described as
processed information, meaning that rough information must be processed before it can be
interpreted. A key element missing from definitions that revolve around the idea of processing is
that intelligence requires a high degree of interpretation, with inevitable speculation. Regardless of
the field of activity in which we are involved, we all have the following concerns:
- problems to solve;
- the need for coherent planning;
- searching, collecting and combining the data;
- providing answers.
Whatever the employer or the objectives on which we are focusing, the previous key
elements are found in the practice of intelligence. Another often used definition, incorporating these
elements, belongs to the Concise Oxford English Dictionary: intelligence means the sum of what is
known, of new information and in the end, the interpretation in order to determine the meaning.
Intelligence is often described in terms like: "where and why is that?". Thus, the association of the
word "intelligence" with fields such as: political, economical, military or criminological, can be
found all around the world.

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One of the skills of practical intelligence is that it can be adapted to the specific and always
changing needs of organisations, so that it becomes a very useful tool, if used properly and applied
in a flexible manner. A feature of intelligence present in any application, is that it serves two
purposes: on the one hand, it supports management, and on the other hand - the operational and
functional levels. Intelligence that aims at the executive and management level, i.e. the mission, the
goals, programs, and resource planning, is named strategic intelligence, due to the gains brought for
the development of organizational strategy. At the other pole, the intelligence that meets the daily
needs of the lower-level managers, specific to current, immediate and routine activities, may be
called operational or tactical intelligence.

Source: McDowell (2009, p. 14)


Figure 1. Uses of strategic intelligence

Strategic intelligence doesn't focus on individual targets, but especially on the general trends
that can be interpreted by analyzing a large number of activities geared towards a specific purpose.
It is an applied research of a particular phenomenon, so that, in due time, the knowledge gained will
help in directing the operations and will provide the basis for the review of policies and legislation.
The basic model is represented by the "standard" process of intelligence, as is taught officially to
operational and analytical personnel from around the world, being easy to understand and use (see
Figure 2).

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Source: McDowell (2009, p. 18)


Figure 2. Intelligence cycle

The above highlighted intelligence process is based on fundamental concepts, being a


system that adapts to any task or goal. In these circumstances, what makes strategic intelligence
special? The easiest way to examine this question is the comparison of the two, step by step, in
order to identify both similarities and differences. The result consists of an adjustment to the
intelligence process, which, by adding or enhancing certain aspects, can be considered a strategic
intelligence plan. In this respect, in order to facilitate the understanding of the differences and
similarities, we present a diagram in Figure 3, which we compare with the cycle of intelligence
found in Figure 2.

Source: McDowell (2009, p. 20)


Figure 3. Strategic intelligence and analysis processes

Trying to synthesize the differences between strategic intelligence and other intelligence-
specific processes, we can say that the specific purpose of the first is to enable efficient high-level
planning and management of resources, so as to be able to deal with the perceived threats. Strategic
intelligence is not an activity geared directly towards tactical objectives of rules application. In this
regard, it becomes necessary to adjust the standard intelligence cycle.

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2. THE ROLE OF STRATEGIC INTELLIGENCE AND ITS IMPACT ON


MANAGEMENT

Strategic intelligence can be considered an integral part of a wider concept - "intellectual


capital" (Roos et al., 1998). According to the authors, "intellectual capital" can be reduced to two
streams of thought: the strategy and quantification. In the strategic field, the focus is on studying
the creation and use of knowledge, as well as on the relationship between knowledge and success or
added value. Quantification aims at the need to develop new information systems and measurement
of non-financial data, along with the traditional, financial ones.
The tangible and intangible resources of a firm can be grouped into two main categories: the
firm's resources and the firm's abilities (Grant, 1991). According to this author, the resources are the
inputs in the production process and the skills relate to its capacity to carry out activities, as a result
of cooperation between teams. In this context, it is necessary to clarify the differences between
tangible and intangible resources: in a study conducted by Johanson et al. (1998), the authors have
concluded that intangible resources can be examined from three perspectives: statistical, managerial
and accounting. Thus, while ten years ago intangible assets classification was in terms of research
and development, software, marketing and training, currently classification schemes are geared
toward the distinction between external(related to customers) and internal structures, on the one
hand, and human capital, on the other (Sveiby, 1997; Roos and Roos, 1997; Petrash, 1996; Skandia,
1995).
Influenced by the theory of resource-based firm, Lowendahl (1997) and Haanes and
Lowendahl (1997) have classified a number of intangible resources from the perspective of strategic
management. Since there is no consensus on the definition of "resources", Haanes and Lowendahl
referred to Itami (1987), according to whom the resources consist of:
- natural resources, human and monetary resources
- knowledge based resources, such as: management skills, technology, consumer information,
reputation, brand and corporate culture.
In regards to its role, strategic intelligence aims at long-term objectives of the agencies,
organizations, groups or Governments. It adheres to the important objectives and general plans,
providing top managers understanding of:
- current and future trends;
- changes in crime environment;
- threats to public safety and order;
- the opportunity to control actions and develop response-programmes;
- possible ways of amending the policies, strategies, programmes and legislation.
If strategic intelligence is not used as a legitimate component of the decision-making
process, there is a danger that the managers are unable to use its full potential in solving major
problems. The main aim of strategic intelligence is to support the achievement of the organization's
objectives. A critical aspect in terms of understanding the role and nature of strategic intelligence is
the acceptance of the reality of these key affirmations (McDowell, 2009, p. 26):
 Strategic intelligence is designed primarily for making decisions specific to long-term
policies.
 Strategic intelligence provides the means of support for operational objectives, by
predicting future challenges, which can have a direct impact on the operational planning.

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Source: McDowell (2009, p.25)


Figure 4. Intelligence integration

Regarding the impact of strategic intelligence on management and organizations, it must be


said that placing a strategic intelligence center for the first time in an organization, brings its
managers, practitioners and "consumers" faca to face with new challenges. Next, we will describe
some of the perceptions, myths and realities concerning strategic intelligence:
a) Resources – with all its benefits, strategic intelligence is not a particularly intensive activity from
the point of view of resources, neither as output of financial flows, nor as a necessity for specialised
personnel. Thus, even if the activities that involve strategic intelligence require intellect and time,
they can be deployed on behalf of an appropriate analytical and intelligent staff. There is, of course,
a need to improve employees through a specialized training.
b) Data need – the specifics of the strategic use of data consists of their application for different and
ample objectives, related to corporate requirements and not operational ones. It is unlikely that
strategic analysis will survive only on the basis of the information already collected by the
organization, because the nature of the tasks requires the collection of new data from a variety of
sources.
c) Creative thinking – It is often noticed that within governmental institutions, the strategic research
suffers in terms of quality, due to standardised and routine approach, data collection planning,
approaches specific to a type of operational thinking prevailing in such organizations. In fact,
strategic thinking appeals to a certain capacity and will to conceptualize research problems and
plans, set out deliberately to overcome organizational rules.
d) Linking practitioners with the management – Strategic analysis activity provides the ability to
create close links between executive, managerial and information staff. In fact, the nature of this
work requires such a rapprochement between players. This aspect is essential in order to ensure that
those who need this "product" ("customers") can relate effectively with providers and practitioners,
so as to facilitate the exchange and negotiation of information, ideas or suggestions. A collaboration
based on respect and proximity in the customer/practitioner relationship is directly beneficial to
achieving the objectives of all the stakeholders involved.
e) Reliability of decisions and forecasts – for activities involving strategic intelligence, the breadth
and detail of studies makes the concerned staff to rely on their power of judgement in carrying out
assessments and projections. This is in direct connection with their duty to comprehensively analyze
issues that not only are complex, but they have a long term impact. It is unlikely for the results of a
strategic intelligence project to be easily measurable, much less in a short time horizon.
Strategic intelligence and analysis require understanding, cultivation and a supportive
environment, if this form of research seeks to provide truly useful results for Executive Directors. In
Figure 5 we will highlight two opposite approaches in relation to the legitimate role of strategic
intelligence and analysis, and in Figure 6 we present the seven "S" model (Viljoen, 1991), which
reveals the key components of the management culture and strategy analysis. Within its framework,

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strategic analysis plays an important role in terms of "grinding" and achieving the objectives of the
organization.

Source: McDowell (2009, p. 29)


Figure 5. Definition of the role of strategic intelligence

Source: McDowell (2009, p. 82)


Figure 6. Seven “S” model

In oreder to be effective, strategic intelligence must be based on a series of management


practices, clearly identified:
i. Regardless of the type of the customer it must respond, strategic intelligence remains a
"total" service, dedicated to providing comprehensive forecasts and assessments.
ii. Sharing information, perspectives, skills and products is critical to success, and managers
muat promote actively this principle.
iii. The client must be educated and helped in order to understand and accept a certain level of
uncertainty, which is specific to any product of strategic intelligence. This is logical, since the
issues involved are much broader and more complex, and the emphasis is on the ability to judge
things, and not on specific approaches or methodologies for measuring statistical data.

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iv. As a consequence of the negotiating climate that should be created between the customer
and information officers, there will be a clear agreement on project objectives.
v. At the same time, it is essential for managers, practitioners and customers to negotiate and
agree - before work starts - on an appropriate mechanism of further review and quantification of
performance/results of the project.
vi. There must be a client/management commitment at higher levels of input and effort, trust
and honesty, that should "feed" strategic intelligence activities.
vii. Managers must make clear and conscious choices on a number of important issues related
to personnel, paying adequate attention to the impact of these decisions for customers, staff and
management:
1. For and against arguments to encourage specialization in the interest areas of the organization.
2. The choice of criteria for the selection of staff, such as: qualifications, experience, organizational
knowledge, career monitoring, multi-skills.
3. The need to improve the professional level of staff and management alike.
4. Career development strategies and opportunities related to and beyond intelligence.
For each strategic issue there are several analytical approaches, which must be taken into
account by the analyst, in order to understand the depth of the subject under study (see Figure 7).

Source: McDowell (2009, p. 215)


Figure 7. Approaches to strategic analysis

In addition, each issue must be tackled using analytical techniques, specifically chosen
because they meet the specific challenges of each component (see Figure 8).

Source: McDowell (2009, p. 215)


Figure 8. Analytical tools useful to strategi analysis

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For example, a database may consist of tables with data (prices, market share, etc.), which
can be modeled statistically. Other databases may consist of interviews with consumers on how to
finance their expenditure. This data type represents new challenges, being exploitable especially on
sociological level, and less on mathematically one.

3. CONCLUSIONS

As a conclusion, we can affirm that strategic intelligence has an essential role in all areas of
management and foundation of corporations' future plans. Although the practice of involving
intelligence (broadly speaking) is not particularly difficult, strategic intelligence is a relatively new
phenomenon for the execution level. The latter is not fully understood, nor with regard to the
commitment and hard work it entails, nor how to make best use of it. Intelligence and strategic
analysis is fundamental to a good planning, requiring a rather small effort, if the organization uses
intelligence to support operational activities.
However, people need a flexible understanding of the fact that this unique product is
somewhat different in terms of information processing. Furthermore, in order to face the challenge
of strategic analysis problems, it takes a commitment to treat the projects in a creative and
imaginative manner, in order to facilitate the research into question. Any attempt to reduce strategic
analysis to an extremely rigid approach and based on a particular process, with all the traditional
dependence (the activity measurement in order to "prove" that the project is proceeding well), will
simply not work..

4. REFERENCES

[1]. Grant, R.M. (1991) The resource-based theory of competitive advantage: implications for
strategy formulation, California Management Review, Vol. 30, No. 3, pp. 114-35.
[2]. Haanes, K.; Lowendahl, B. (1997) The unit of activity: towards an alternative to the theories of
the firm, in Thomas, H. et al. (Eds), Strategy, Structure and Style, John Wiley & Sons Ltd.
[3]. Itami, H. (1987) Mobilising Invisible Assets, Harvard University Press, Cambridge, MA.
[4]. Johanson, U.; Ekloè, G.; Holmgren, M.; Martensson, M. (1998) Human Resource Costing and
Accounting versus the Balanced Scorecard, a Report to OECD, Working paper.
[5]. Lowendahl, B. (1997) Strategic Management of Professional Service Firms, Handelshojskolens
Forlag, Copenhagen.
[6]. McDowell, D. (2009) Strategic intelligence: a handbook for practitioners, managers and users,
Revised Edition, The Scarecrow Press Inc., Lanham, Maryland; Toronto; Plymouth, UK.
[7]. Petrash, G. (1996) Dow's journey to a knowledge value management culture, European
Management Journal, Vol. 14, No. 4, pp. 365-73.
[8]. Roos, R.; Roos, J. (1997) Measuring your company's intellectual performance, Longe Range
Planning, Vol. 30, No. 3, pp. 413-426.
[9]. Roos, J.; Roos, G.; Edvinsson, L.; Dragonetti, N.C. (1998) Intellectual Capital - Navigating in
the New Business Landscape, New York University Press.
[10]. Skandia (1995) Value Creating Processes, Supplement to 1995 Skandia Annual Report, 1995.
[11]. Sveiby, K.E. (1997) The New Organizational Wealth. Managing & Measuring Knowledge-
Based Assets, Berrett-Koehler Publishers, Inc.
[12]. Viljoen, J. (1991) Strategic Management: How to Analyse, Choose and Implement Corporate
Strategies, Longman Professional, Melbourne, Australia.

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Public Administration 2013

A CONCEPTUAL FRAMEWORK FOR SUSTAINABLE POULTRY


SUPPLY CHAIN MODEL
Associate Professor Mohammad SHAMSUDDOHA
University of Chittagong, Bangladesh
mdsdoha@gmail.com

Associate Professor Ph.D. Alexandru NEDELEA
Ştefan cel Mare University of Suceava, Romania
alexandrun@seap.usv.ro

Abstract:
Now a day, sustainable supply chain is the crucially considerable matter for future focused industries. As a
result, attention in supply chain management has increasingly amplified since the 1980s when firms discovered its
benefits of mutual relationships within and beyond their own organization. This is why, concern researchers are trying
hard to develop new theory or model which might help the corporate sector for achieving sustainability in their supply
chains. This kind of reflection can be seen by the number of papers published and in particular by journal since 1980.
The objectives of this paper are twofold. First, it offers a literature review on sustainable supply chain management
taking papers published in last three decades. Second, it offers a conceptual sustainable supply chain process model in
light of triple bottom line theory. The model has been developed by taking in-depth interview of an entrepreneur from a
Poultry case industry in Bangladesh.

Key words: Sustainability, Supply chain Management, Poultry Farming

JEL classification: M1, R41

INTRODUCTION

Production procedures along with suppliers, stakeholders and customers are linked by
information, material and capital flows. In line with the value of the product comes the
environmental and social burden incurred during different stages of production (Corbett &
Kleindorfer, 2003; Seuring & Muller, 2008). To uphold unharmed environment for the next
generation, it is always crucial for the industry to maintain their optimum productions based on
changing customers’ demands. Besides that, Literature review suggests that organizational
sustainability consists of three components: the natural environment, society, and economic
performance (Elkington, 2004). These triple bottom lines of social, environmental and economic
aspects are dealt in sustainability which is vital and acute to maintain by a company. It is always
intricate for the corporates to combine sustainability and supply chain management involved with
their production process in order to gaining sustainability. In Bangladesh, thousands of poultry
farms have grown up through private ownership without getting adequate scientific knowledge on
it. Lots of poultry owners practices triple bottom line of sustainability but not in organized way.
There is plethora research works on it so that farmers or its stakeholders can understand what they
should do for the effective sustainability within this industry.

LITERATURE

The APICS Dictionary describes the supply chain as the processes from the initial raw
materials to the ultimate consumption of the finished product linking across supplier, user
companies; and the functions within and outside a company that enable the value chain to make
products and provide services to the customer (Cox, Blackstone, & Spencer, 1995). The Supply
Chain Council (1997) uses different dimensional definition of “A term increasingly used by
logistics professionals – encompasses every effort involved in producing and delivering a final
product, from the supplier’s supplier to the customer’s customer. Four basic processes – plan,

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source, make, deliver – broadly define these efforts, which include managing supply and demand,
sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking,
order entry and order management, distribution across all channels, and delivery to the customer”
(Quinn, 1997). Once more, supply chain management is “an integrating philosophy to manage the
total flow of a distribution channel from supplier to ultimate customer” (Ellram & M. Cooper,
1993).
Supply chain management has been defined by Mentzer (2002) as, “the systemic, strategic
coordination of the traditional business functions and the tactics across these business functions
within a particular company and across businesses within the supply chain, for the purposes of
improving the long-term performance of the individual companies and the supply chain as a
whole”. According to Lummus and Vokurka, Supply chain can be stated as: all the activities
involved in delivering a product from raw material through to the customer including sourcing raw
materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry
and order management, distribution across all channels, delivery to the customer, and the
information systems necessary to monitor all of these activities. Supply chain management
coordinates and integrates all of these activities into a seamless process. It links all of the partners in
the chain including departments within an organization and the external partners including
suppliers, carriers, third-party companies, and information systems providers (Lummus & Vokurka,
1999).
A focus on supply chains is a step towards the broader adoption and development of
sustainability, since the supply chain considers the product from initial processing of raw materials
to delivery to the customer. However, sustainability also must integrate issues and flows that extend
beyond the core of supply chain management: product design, manufacturing by-products, by-
products produced during product use, product life extension, product end-of-life, and recovery
processes at end-of-life (Jonathan D. Linton, Robert Klassen, & Vaidyanathan Jayaraman, 2007).
Apart from supply chain, sustainability described as “the potential for reducing long-term
risks associated with resource depletion, fluctuations in energy costs, product liabilities, and
pollution and waste management”(Shrivastava, 1995a). Again, more micro-economic applications
of sustainability have been investigated in the fields of management, operations, and engineering.
Within the management literature, most of the existing conceptualizations of organizational
sustainability have focused on ecological (e.g. the natural environment) sustainability, with only
implicit recognition of social and economic responsibilities (Jennings & Zandbergen, 1995).
Above literature shown that number of research works have been done with sustainability,
supply chain and sustainable supply chain management. But, there are some gaps in implementing
this theory to the practical fields or particular industry or specific operation which might practice
different way to implement as the environment differs from circumstances and location.

METHODOLOGY

The study covered literature review on supply chain, sustainability with triple bottom line,
and Bangladesh Poultry Industry to understand realities of those matters. This paper used
observation tool to generate sustainable supply chain process model for Bangladesh poultry in light
of economic, social and environmental benefits and impacts. Both primary and secondary
information have been used in this study. Primary information were collected from May 2011 to
June 2011, mainly through in-depth interviews with the sample respondents. The total respondents
were five business (poultry) entreprenuers who are having a long experience in this industry. The
reason behind to choose them as sample respondents due to substantial knowledge on this industry.
Secondary information like literature were collected from different published documents such as
referral journal paper, survey reports, statistical yearbooks and NGOs reports.

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BANGLADESH POULTRY AT A GLANCE

Bangladesh agriculture generates 19% of the GDP (BBS, 2003) and the contribution of the
livestock sub-sector to GDP and the agriculture sector as a whole is currently 3.2% and 10.11%
respectively ("Discovery Bangladesh," 2009). The information is showing much potential to
develop as a commercial sector with employment and income generating opportunities both in the
rural and urban areas. A large number of enterprises-cattle, poultry and dairy farms have grown in
the private sector in recent years. As an important sub-sector of livestock production, the poultry
industry in Bangladesh plays a crucial role in economic growth and simultaneously creates
numerous employment opportunities. The poultry industry, as a fundamental part of animal
production, is committed to supplying the nation with a cheap source of good quality nutritious
animal protein in terms of meat and eggs. Approximately 20% of the protein consumed in
Bangladesh originates from poultry. Among poultry species, the chicken population is dominant
over others, at almost 90%, followed by ducks (8%) and a small number of quail, pigeons and
geese. Free range ‘backyard’ and scavenging poultry, that are traditionally reared by rural women
and children, still play an important role in generating family income, in addition to improving the
family's diet with eggs and meat. Productive and reproductive performance of indigenous birds is
relatively very low (35-40 eggs and 1-1.5 kg meat per bird per year) ("Cambridge Journal," 2009).
In a condition, where majority of the people are landless, under privileged, malnourished,
uneducated and poor, poultry rearing can play a very important role for income generation
(Shamsuddoha, Quaddus, & Klass, 2011), poverty eradication, women empowerment, nutrition,
food security and country's economical and development procedure.

POULTRY INPUT AND OUTOUT PROCESS IN BANGLADESH

Figure one in the below shows that feed, medicine & vaccines, skilled-unskilled-semi-
skilled labors, management decisions, egg production values, mortality rates, utilities such as
electricity, gas, water, transportation and government policy/decisions are the major input in the
poultry industry in Bangladesh. These elements are extremely important for this industry as
economic successes are depends on those. In the middle of the figure one is presenting the main
process of this industry. Poultry industry starts from pure line breed which is top-secret breed
conserved by major countries of France, Canada, USA, China and so. Bangladesh poultry industry
begins from grandparent which is one step underneath of pure line breed. The supply chain can be
enhanced from ultimate product of meat and eggs towards different processed food. This is the
major scope of doing further research as well.

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Figure 1: Schematic Representation of Poultry Input-Output Process in Bangladesh


Source: Interview

This phase generates lots of poultry wastes, typical poultry meat and eggs, culled birds, day
old chicks and hatching eggs. Poultry wasted includes manure, litter, damaged eggs, rejected eggs,
waste feed, poultry intestine and duck feed and feather. All these can be used for further raw
materials in different types of industry like small scale power manufacturing business through bio-
gas, pillow making industry by using feather, fertilizer manufacturing industry from manure and
wastes, fish feed from intestine and rejected eggs, charcoal from poultry litter and so. This process
can easily determine how many birds will be remaining in the farm after having mortality, disease
etc. Table 1 shows the different by-products which come from poultry wastes through further
process. All these by-products are very important and basic needs for Bangladeshi agriculture
sector. Thus, it can further contribute to other industry as well. Again, Table 2 shows the economic
and social aspect of Bangladeshi poultry farms. In fact, lots of people are engaging with this
industry at different levels. The researcher only concentrated the three types of farming within the
poultry industry such as grand farms, breeder farms and broiler/layer farms. In this whole process,
society is getting huge benefits including generating new businesses and entrepreneurs, reduce
unemployment, minimize dependence rate, empowering women etc.
In the output phase, meat and eggs are not the only products that customers can get from the
poultry industry. There are some other output like bi-products (manure, bio-gas, feather, fish feed,
charcoal), day old chicks, culled birds which can be sold in the market for customer consumption,
eggs (fresh and rejected), meat (ready market and further processing) are generating as a poultry
industry output. Besides that lots of associate industries are relating with poultry industry such as
feed, medicine, pathological resources, logistics, cages, expertise, breed supplier, importers,
distributors and other associated farmers. It is always difficult to maintain all the stakeholders
without implementing effective supply chain into this industry. For this reason, the researcher tried

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to dig out the further improvements of this industry in the light of sustainable supply chain which is
very much related with triple bottom line theory.

Table 1: Possible Bi-Product from Poultry Wastes


Wastes Generate Industry
Fertilizers Crop
Poultry Wastes Bio-gas Power
Charcoal Power
Poultry Feed Wastes Fish Feed Fish
Poultry Feathers Bed and Pillow Pillow
Damaged Eggs Cake and Biscuits Bakery
Source: Interview

In the same figure, the researcher indicates the different output which can easily classified
into three different ways. In the economic view point, fresh meat, fresh eggs and processed meat are
the main economic products for the poultry owner. Besides that, there are huge prospects to make
bi-products from poultry wastes those also very good economic viable bi-products. In social view
point, Bangladeshi poultry industry is really rich which engages more than 15 million people
(according to government official) directly or indirectly. This business is extending out in the
remote areas which help to reduce poverty, diminish unemployment, and empower women. Finally,
proper poultry waste management meeting up environmental side of sustainability that keeps
environment unchanged or intact and recycle or reuse the wastes economically. Besides that the
economic aspects is very bright in this process as every circle denotes one single business with
required investments and employments due to commercialization of poultry industry. In every
single stage of poultry supply chain process model indicates social, environmental and economic
well-being which is very much essential to achieve sustainability within a business operation.

Table 2: Possible social and economic outcome


For 1000 birds Cycle Tenure in Employment (Per
Days Cycle)
Grand Parent Farms 250-350 10-15
Breeder Farms 300-420 15-20
Broiler Farms 30-40 1-3
from Bangladeshi poultry; Source: Interview

In the figure two, upper portion of process can maintain strong social aspect of
sustainability. This social section can generate huge employment through poultry rearing, can give
social recognition as an entrepreneurs or businessman, meet up social requirement of protein and
food values, and can reduce poverty level which is very effective for country like Bangladesh.
Besides that, this kind of expansion can bring lots of merits in the society like create young and
women entrepreneurs, alternative income generating business, engagement of idle family members
in productive way, reduce unemployment rate, part time working facilities and so on. These kinds
of activities can change whole society as a productive nature.
In the bottom-left side of figure two shows the environmental issues of poultry industry in
Bangladesh. By taking in-depth interview from experienced poultry owner, the researcher came to
know that there are insignificant use of poultry wastes make the environment polluted and
destroying living environment as well. The sample respondents are doing some environmental
practices which help them to free from poultry disease, blockade of lands and making some money
by creating bi-products (bio-gas, fertilizers and fish feed) from wastes.
Furthermore, bottom-right side of figure two indicates the economic issues of poultry
industry in Bangladesh. In fact, the whole model is meeting up economic aspects in the context of
generating value added products, different types of small scale industry and making extra profit. In
this particular economic section which is circled by square dots can generate huge economic boost
by increasing production. Bangladesh is a small country with 153.5 million peoples who need to get

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optimum amount of protein supply from poultry industry. This is the scope lying on this industry
which can give the huge benefits to its all stakeholders including ultimate customers, governments,
entrepreneurs, suppliers, banks etc.

Social

Economic

Environmental
Figure 2: Possible implementation of Triple bottom line
of Sustainability in the poultry sector of Bangladesh.

Apart from triple bottom line issues, supply chain is very much related issue with this
proposed sustainable supply chain poultry model. Only effective supply chain can implement the
whole system as workable and profitable. In this case, forward supply chain (FSC) and reverse
supply chain (RSC) issues will be the key to expand the whole business in a sustainable manner.
Thus, Bangladesh can achieve great success if they can combine sustainability and supply chain
attribute in their poultry industry.

FURTHER DIRECTION AND CONCLUSIONS

This paper develops a proposed process model in light of sustainability and supply chain
issues. The study did not investigate or explore the model empirically which might have a different
outcome. The proposed model was developed based on in-depth interview of existing leading
poultry entrepreneurs. Future research could test the entire proposed process model to find out the
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outcoming or impacts of total industry including effective operation. The model has already
depicted three facets of social, economic and environment blocks of triple bottom line. Further
research can be done partly basis as well. Researchers have intention to have further study on such
unexplored issues. Such kind of research will definitely help Bangladeshi poultry stakeholders to
operate their current businesses that will be more sustainable having effective supply chain
management.

REFERENCES

1. BBS. (2003). Statistical Year Book Bangladesh 2003. Dhaka, Bangladesh: Retrieved from
www.bbs.gov.bd
2. Cambridge Journal. (2009).
3. Corbett, C. J., & Kleindorfer, P. R. (2003). Environmental management and operations
management: introduction to the third special issue. Production and Operations Management
12(3), 287–289.
4. Cox, J. F., Blackstone, J. H., & Spencer, M. S. (1995). APICS Dictionary (8th ed.).Vol. 8, Falls
Church, VA.: (American Production and Inventory Control Society).
5. Discovery Bangladesh. (2009).
6. Elkington, J. (2004). Enter the triple bottom line in Henriques, A. and Richardson, J. (Eds); The
Triple Bottom Line: Does It All Add up? Earthscan, 1-16.
7. Ellram, L., & M. Cooper. (1993). Characteristics of supply chain management and the
implications for purchasing and logistics strategy. International Journal of Logistics Management,
4(2), 1-10.
8. Jennings, P. D., & Zandbergen, P. A. (1995). Ecologically sustainable organizations: an
institutional approach. The Academy of Management review, 20(4), 1015-1052. Retrieved from
http://sfx.lis.curtin.edu.au/sfx_local?sid=google&auinit=PD&aulast=Jennings&atitle=Ecologically
%20sustainable%20organizations%3A%20an%20institutional%20approach&title=The%20Academ
y%20of%20Management%20review&volume=20&issue=4&date=1995&spage=1015&issn=0363-
7425
9. Jonathan D. Linton, Robert Klassen, & Vaidyanathan Jayaraman. (2007). Sustainable supply
chains: An introduction. Journal of Operations Management, 25, 1075–1082.
10. Lummus, R. R., & Vokurka, R. J. (1999). Defining supply chain management: a historical
perspective and practical guidelines. Industrial Management & Data Systems, 99(1), 11-17.
11. Mentzer, J. T., DeWitt, W., Keebler, J. S., Min, S., Nix, N. W., Smith, C. D., & Zacharia, Z.
(2002). Defining supply chain management. Journal of Business Logistics, 22(2), 1-25.
12. Quinn, F. J. (1997). “What’s the buzz?”. Logistics Management, 36(2), 43-47.
13. Seuring, S., & Muller, M. (2008). From a literature review to a conceptual framework for
sustainable supply chain management. Journal of Cleaner Production, 16, 1699-1710.
14. Shamsuddoha, M., Quaddus, M., & Klass, D. (2011, 28-30 November 2011). Incorporating
Reverse Supply Chain in the Poultry Process of Bangladesh Paper presented at the Australian New
Zealand Marketing Academy Conference 2011, Perth, Western Australia
15. Shrivastava. (1995a). The role of corporations in achieving ecological sustainability. Academy
of Management Review, 20(4), 936-960.

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Public Administration 2013

RESEARCH RESOURCES FOR AN EFFICIENT ROMANIAN-


GERMAN COMMUNICATION IN THE FIELDS OF LAW AND
ADMINISTRATION
PhD. Student Carol Alexandru MOHR
Stefan cel Mare University of Suceava, Romania
carl@mohr.ro

Assoc. Prof. PhD. Carmen CHAŞOVSCHI
Stefan cel Mare University of Suceava, Romania
carmenc@seap.usv.ro

Abstract:
The first requirement the sender of a message must meet, is to identify the receiver’s levels of language and
cultural competence. Administrative or legal clerks often overlook this aspect when communicating with the citizens
(both in Romania and Germany, as well as in other countries). In the case of intercultural and interlinguistic
communication in the legal and the administrative fields, there are also other additional issues determined by the
differences between systems and their functioning as well as by the users’ different perspectives. The translators’, as
well as the civil servants’ or law clerks’ research activity has undergone radical changes during the past twenty years.
The main event that has triggered these changes was the replacement of the typewriter with the personal computer,
followed by the availability of the Internet connection. The research and data or text processing resources that are
currently available for clerks and translators are more comprehensive and more complex than what was at their
disposal a few decades ago. Decisions must be reliable and this takes a rather considerable amount of research. The
efficiency of the research depends on the adequacy of the research instruments and sources being used. The present
paper presents some documentation sources and resources which could be useful for the civil servants and linguistic
mediators. For a proper intercultural mediation in this field, the parts involved should improve their skills permanently,
ant not rely solely on intuition and experience.

Key words: documentation resources, intercultural communication, translation, mediation, legal and
administrative fields.

JEL classification: D83, H11, H83, K10, K33, L86

INTRODUCTION

In order to be efficient, communication should not be limited to the mere conveyance of


information, but it should also affect the receiver to a certain extent. Communication acts may be
defined as failed if:
- they have no effect or
- if they have effects other than the desired ones.
In order to make him/herself understood, the sender should organise the content of the
message depending on the receiver’s cultural competence, and to express the message by means of
a language that agrees with the receiver’s language competence. Administrative or legal clerks often
overlook this aspect when communicating with the citizens (both in Romania and Germany, as well
as in other countries).
In the case of interlinguistic and intercultural communication, the sender does not exert a
direct influence on the receiver, but resorts to a linguistic and cultural mediator who, in order to be
efficient ( Reiß and Vermeer 1984) [1], must possess thorough knowledge of the languages and
historical culture of the communication parties and should also be able to identify their levels of
cultural and linguistic competence. If the sender is the one who must adjust his message to the
receiver’s competence (and identify the stimuli that animate the receiver) in intralinguistic
communication, in the case of interlinguistic and intercultural communication, the linguistic
mediator is the one who assumes this mission.

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A speaker’s linguistic competence level arises from the particular functional language combinations
(syntopic, synstratic or synphasic, simultaneously) [2] (Coseriu and Albrecht 2007), (Coseriu
2007), (Coseriu 1988) that s/he uses in speech acts or in developing and writing texts. Similarly, the
cultural competence of an individual who belongs to a certain historical culture, i.e. to a historical
development stage of a national culture, resides in the combination of cultural aspects (either
popular or scientific, regional or national, intellectual or emotional, etc.) that make up the contents
of the messages s/he conveys.
Mediation is considered adequate in interlinguistic or intercultural communication if the
linguistic mediator manages to:
a) identify the linguistic and cultural competence of the speaker or author of the text (in
the source language and culture) in order to accurately and completely understand the
message,
b) choose (in the target language and culture) the best combination of functional
languages and cultural aspects that would prevent the translated communication from
being limited to a mere transfer of information and have the desired effects.

The intricacy of the cultural and linguistic varieties generate the most difficult to solve issues
in linguistic mediation processes. In the case of intercultural and interlinguistic communication in
the legal and the administrative fields, there are also other additional issues triggered by the
differences between systems and their functioning as well as by the users’ different perspectives.
When making decisions, the civil servant or the linguistic mediator should not rely solely on
intuition and experience. Decisions must be reliable and this takes a rather considerable amount of
research. The efficiency of the research depends on the adequacy of the research instruments and
sources being used.
The translators’, as well as the civil servants’ or law clerks’ research activity has undergone
radical changes during the past twenty years. The main event that has triggered these changes was
the replacement of the typewriter with the personal computer, followed by the availability of the
Internet connection. The research and data or text processing resources that are currently available
for clerks and translators are more comprehensive and more complex than what was at their
disposal a few decades ago. The texts on the web are usually elements (units) of a hypertext, i.e. of
a network of texts, connected through links (Bussmann 2008, 271). If clerks and translators do not
acquire adequate search techniques and miss the purpose of research, they will surf around
uselessly, from one link to another, without finding the information they need. Therefore, they need
to find out which electronic portals are indeed useful for research in order to settle a juridical-
administrative issue or to translate a certain type or sort of text. We will next present a number of
research resources which, if used appropriately, can be considered very useful instruments of
interlinguistic and intercultural communication in the legal and administrative fields. Clearly, each
of the instruments presented below have their own advantages and drawbacks, which we will
specifically outline.

BI- AND MULTI-LINGUAL RESOURCES


IATE – INTERACTIVE TERMINOLOGY FOR EUROPE

IATE (Inter-Active Terminology for Europe) is the specific words bank of all EU
organisations. One can basically search for words in the 25 official languages of the European
Union. As can be observed on the search interface presented below, users can select both the source
and the target language. The data base contains about 1,4 million records that have been imported
from the data bases previously developed by each of the central organisations of the EU, namely:
Eurodicautom (the data base of the EU Commission), TIS (the data base of the EU Council),
Euterpe (the data base of the EU Parliament), Euroterms (the data base of the Translations Centre)
and CDCTERM (the data base of the European Court of Accounts).

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This research instrument is mainly useful for understanding and translating administrative or
legal texts that make reference to community law. However, the data bank is not exhaustive, as it
particularly lacks information on the words in the newest official languages of the EU (such as
Bulgarian or Romanian).
As an example, we have listed the search results for the Romanian equivalent of the German
word Berufung (appeal, Ro. apel).

Figure no. 1. Search results of the Romanian translation options for the term “Berufung”
Source: http://iate.europa.eu/SearchByQuery.do [accessed on 12.04.2013]

As you can see in figure no. 1, the results are rather eloquent. However, we should mention
that the use of the term Berufung in the juridical texts of the European Union does not equate with
the use of this word in the juridical texts related to the national law of the states and provinces
whose official language is German (for instance, in the European law texts there are more
compound nouns that include this word that in the German law texts).

DICT.CC.

dict.cc is a digital corpus available online and made up of several bilingual dictionaries. This
platform is interactive, i.e. it offers its users the chance to contribute to the qualitative and
quantitative enrichment of the data base. The translation options suggested by users are not
automatically included in the data base, but undergo a thorough assessment. The platform also
includes a forum where translators and clerks (or other people with an interest in translations) can
exchange views on the various translation issues or can contribute with comments.
The corpus contains over 46.000 corresponding terms in Romanian and German phrases.
Some of these equivalent terms refer to the legal or administrative field. The image below presents
the search results for the Romanian equivalents of the terminological and lexical element Berufung.
The equivalent vocation is accurately indicated for the word Berufung, while appeal (Ro. apel) is
the suggested equivalent for the juridical term Berufung. Moreover, one can also find the translation
of the phrase Berufung einlegen (to make an appeal).

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Figure no. 2. Search results of the Romanian translation options for the word/term “Berufung”
Source: http://www.dict.cc , [accessed on 7.08.2013]

One drawback of this research instrument is the fact that it cannot guarantee the validity of
the suggested translation options. However, the site administrator guarantees that any translation
suggestion is overviewed by other users.

GLOSBE - DAS MEHRSPRACHIGE ONLINE-WÖRTERBUCH

Glosbe is self-described on the web as an enormous collection of dictionaries for almost all
existing languages in use. This platform also offers correct translation equivalents for the word
Berufung. As for the juridical term Berufung, the equivalents appeal (Ro. apel) and recourse (Ro.
recurs) are indicated. Unfortunately, only the terminological equivalence Berufung - appeal is
correct.
Moreover, this platform also offers translation memories which enable the search for phrases
and words in corpora that provide bilingual versions of certain texts. As we have noted, the
Romanian-German corpus is mainly made up of texts from the European Union regulations and
jurisprudence.

Figure no. 3. Search results for the Romanian translation options for the word/term “Berufung”
Source: http://de.glosbe.com/, [accessed on 7.08.2012]

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The image below (figure no. 4) is representative of how a German juridical-administrative


phrase (the phrase Massregel der Besserung was selected as an example) that does not have an
acceptable Romanian equivalent, is used in various texts. Alongside, we have presented the
Romanian version of the respective texts. One can see how, in a certain context, the phrase
Massregel der Sicherung und Besserung is translated as preventive measure. In a different context,
the phrase Massregel der Sicherung is translated as deprivation of freedom safety measure.

Figure no. 4. Search results for the Romanian translation options for the word/term “Berufung”
Source: http://glosbe.com/de/ro/Massregel%20der%20Besserung, [accessed on 7.08.2012]

Even though the Romanian versions of the European juridical and administrative documents
give the impression that these are more likely conjectural translations that exemplary translations,
we appreciate the fact that these translation memories can provide clerks and translators with some
guidance as concerns the appropriate use of particularly difficult to understand, or translate phrases
in a text.

LEGAL RESEARCH RESOURCES

Clerks and translators of legal and administrative texts should also have acquired some
specialised knowledge. The global circumstances require specialised knowledge for the civil service
in a member state of the European Union and the translation activity to be performed in a competent
and efficient manner. Any kind of specialisation entails the use of research materials. We will
further present a few research resources, highlighting their utility for the comprehension or
translation of German administrative or legal texts.

DEJURE.ORG

dejure.org is a legal research portal whose data bank comprises the texts of about 270
regulatory texts of the German legal system. The portal also provides links to the texts of more than
1.000.000 court orders stored in various official and unofficial data bases. There is also an
alphabetical index of the regulatory measures which enable one to find the text when the user
knows the official name of the respective document. Moreover, the texts of the regulatory measures
are grouped depending on the field they refer to (civil law, labour law, commercial or business law,
etc). This application also enables the research of the occurrence of the terms in the texts comprised
in the data base. For instance, the term Berufung occurs 373 times in the texts listed in this corpus.

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Figure no. 5. Occurrence of the term Berufung in the dejure.org corpus


Source: www.dejure.org [accessed on 12.05.2013]

However, even though it comprises a relatively small number of texts, this corpus is a highly
efficient instrument for the translation practice or for legal and administrative research. This
example highlights the fact that the utility of a corpus does not necessarily depend on the amount of
data it comprises. Even a small corpus can be useful if:
- the texts it contains have been selected depending on their relevancy;
- it is systematically structured;
and
- the search functions are well interrelated and suit the research purpose.

OPENJUR.DE

The OpenJur data bank has been developed and is administered by a non-profit organisation
in Hamburg. The cornerstone principle of this organisation is as follows: all those subject to the law
should benefit from free access to any kind of legal, regulatory or jurisprudence related information.
The data base comprises more than 300.000 court orders from all the fields of law and judicial
practice. The platform provides a search function by key words or groups of words. As you can see
below, the term Berufung was found in more than 1000 court orders of various trial courts in
Germany.

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Figure no. 6. Occurrence of the term Berufung in the court orders included in the
openJur corpus
Source: http://openjur.de/suche/ [accessed on 12.05.2013]

This collection of court orders is highly important, as it enables one to become familiar with
various form related aspects that are specific of the German jurisprudence. There are certain form
related differences between German and Romanian court orders. For instance, in German court
orders, the ruling formula (disposition of the sentence/decree) is inserted before the motivation of
the order, while in Romanian orders it occurs after the motivation, as a logical conclusion. This
jurisprudence corpus enables one to identify standard formulae. Apart from this, the platform user
can get a general idea about the way German lawmakers in Germany think as far as the enforcement
of the law is concerned. After a thorough analysis of the contents and the logic behind court orders,
one can conclude that, more often than not, German judges really do judge and not only rule
sentences.

WWW.GEZETZE-IM-INTERNET.DE

The German Federal Ministry of Justice and the private company juris GmbH, have created
a data base that comprises the entire federal legislation currently in use. The information is available
for free to all interested parties, on the website www.gesetze-im-internet.de. The application
provides search functions both by title of regulatory measure and by words or phrases. However, as
we have mentioned above, such functions are also made available on other electronic platforms as
well. The specific feature of this website is the fact that it also provides English versions of the
regulatory documents.

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Figure no. 7. Caption of the contents of the German Fiscal Code. English official version
Source: http://www.gesetze-im-internet.de/englisch_ao/index.html [accessed on 12.06.2013]

Polyglot translators usually manage to translate a text in the target language sooner and
more accurately if, apart from the original source text, they also have versions of the same text in
different languages. This ability can be explained as follows: the original text is the object of the
translation act, while the translations into various languages are images of this object (i.e.
projections in other linguistic systems).When apart from the object (i.e. apart from the original text
in the source language A) the translator also has an image of it (i.e. a translation into a language B
that s/he knows), he can create another image (i.e. a translation into the target language C) faster
and more accurately than if s/he had only the object at their disposal. The following corollary
ensues is we apply this reasoning to the present situation:
For the translators of legal texts who have English and German as basic work
languages, but who also know English (more or less) as well, the English version
of a German legal text is of great assistance for a more efficient translation into
Romanian and for a better outcome of the translation process.

THE OFFICIAL JOURNAL OF ROMANIA, THE LEGISLATIVE DATA BASE OF


THE CHAMBER OF DEPUTIES AND LEGAL INFORMATION SYSTEMS PROVIDED
BY PRIVATE COMPANIES

The Internet also provides numerous research sources related to Romanian regulations and
jurisprudence. The safest sources are, clearly, the official ones, such as The Official Journal or the
Legislative data base of the Chamber of Deputies.
While the legislative array developed by the Legislative Committee of the Chamber of
Deputies can be accessed for free, the information provided by the electronic platform of the
Official Journal is only partially free of charge. From an ethical perspective, this can be deemed as
unfair, since any individual who is subject to a certain regulatory standard should have free and
easy access to the contents of that particular standard [3].
We have also identified another drawback in terms of the legislative range of documents
developed by the Legislative Committee and published on the website of the Chamber of Deputies:
users are warned that the “published information” as well as the “texts of the regulatory documents
are not official” and, therefore, they cannot be brought into question with the administrative or legal
officials. On the other hand, the same page that specifies this piece of information, the Legislative

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Committee presents itself as a “specialised consultative office of the Parliament” which has, among
other things, the obligation to “develop and publish legal documents”, an obligation that “is founded
on the principle of a single official regulatory registry existing in Romania that would allow one to
know the exact juridical status of each regulatory measure at a given moment in history”. And,
since the Legislative Committee has this obligation, it would not have the right to claim any
competency in guaranteeing the official nature of the regulatory documents it publishes.
Another aspect to be taken into account is that the data base is not updated in real time. As
can be noted in the image below, on 17.09.2013 the platform only displayed the regulatory
documents issued before 20.05.2013.

Figure no. 8. Portal of the legislative array published online by the


Legislative Committee of the Chamber of Deputies [4]
Source: http://www.cdep.ro/pls/legis/legis_pck.frame [accessed on 17.09.2013]

The electronic portal of the Official Journal provides search functions according to the
following criteria: type and/or number of the document, date and/or number of the issue, application
range of the regulatory measure. One can also search by words, phrases or parts of text. The
example below shows the search results for the “key word” appeal (Ro. apel), which occurs over
4000 times in this corpus.

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Figure no. 9. Search results of key word “appeal” (Ro. apel) on the portal of Official Journal
Source: http://www.expert-monitor.ro/LexMonitor/Demo/index.jsp [accessed on 17.09.2013]

Generally, the data and the functions provided by these two official platforms are sufficient
for the research undertaken by the translators of legal texts (certainly, in the field of legal
regulations and not in jurisprudence).
However, clerks and legal experts (i.e. specialists whose activity, unlike that of translators,
has direct administrative or juridical consequences) believe these information systems to be less
efficient. Therefore, their research relies on online resources provided (often on a fee basis) by
private companies, such as: Lex Expert (a product developed by the Information Company Neamț,
see www.lexexpert.ro), Legis (a legislative software provided by S.C. Territorial Centre of
Electronic Calculus S.A. from Piatra Neamț, see www.legis.ro) or Lege [5] (a solution developed
by Indaco Systems from Bucharest, see www.lege5.ro).
These research systems have emerged on the market and sell really well especially due to
the fact that the Official Journal does not provide efficient search instruments for the administrative
or legal practice. The user licenses for these legislative information systems are not very cheap
either. However, as we stated before, these instruments are not mandatory in the legal text
translation practice. In this respect, translators are exempt from the payment of costly subscriptions.
We can, however, most positively state that this would be about the only financial perk translators
of legal or administrative texts have, as compared to clerks or legal experts.

CONCLUSIONS

The professional profile of both translators and clerks (from the Prime Minister to the town
hall secretary) has changed: only those who pursue further training and demonstrate intercultural
competence will succeed in the administrative system, in politics or on the translation market.
Efficiency has become a prerequisite criterion in the assessment of administrative or translation
activities [5]. Similarly, the research activity should be completed in a short time interval. The large
amount of available information (electronic corpora, thesauri, word data bases, etc.) can also raise
certain difficulties for clerks and translators. They may get confused in the abundance of
connections in the World Wide Web if they don’t know WHERE and HOW to find relevant pieces
of information.

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ACKNOWLEDGMENT
This paper has been financially supported within the project entitled „Doctorate: an Attractive
Research
Career”, contract number POSDRU/107/1.5/S/77946, co-financed by European Social Fund
through Sectoral
Operational Programme for Human Resources Development 2007-2013. Investing in people!”

ENDNOTES

[1] That is to complete the purpose of the translation process (see Reiß and Vermeer 1984).
[2] We are using the phrases functional language, syntopic, synstratic and synphasic as defined by
Coseriu. See (Coseriu and Albrecht 2007), (Coseriu 2007), (Coseriu 1988).
[3] Ideally, there should also be versions of the regulatory documents written in terms that any
individual subject to such standards would understand.
[4] As noted in the figure no. 8, the administrators of this data base do not use diacritical marks
consistently.
[5] Unfortunately, this criterion has become even more important than quality in several cases.

REFERENCES

1. Bussmann, Hadumod, Hartmut Lauffer. 2008. Lexikon der Sprachwissenschaft. Stuttgart: Alfred
Kröner.
2. Coseriu, Eugenio. 1988. Einführung in die allgemeine Sprachwissenschaft. Tübingen: Francke.
3. ———, 2007. Sprachkompetenz: Grundzüge der Theorie des Sprechens. 2., durchgesehene Aufl.
Tübinger Beiträge zur Linguistik 508. Tübingen: Narr.
4. Coseriu, Eugenio, Jörn Albrecht. 2007. Textlinguistik: eine Einführung. Tübingen: Narr.
5. Reiss, Katharina, Hans J Vermeer. 1984. Grundlegung einer allgemeinen Translationstheorie.
Tübingen: M. Niemeyer.
6. http://iate.europa.eu/SearchByQuery.do [accessed on 12.04.2013]
7. http://www.dict.cc , [accessed on 7.08.2013]
8. http://de.glosbe.com/, [accessed on 7.08.2012]
9. http://glosbe.com/de/ro/Massregel%20der%20Besserung, [accessed on 7.08.2012]
10. www.dejure.org [accessed on 12.05.2013]
11. http://openjur.de/suche/ [accessed on 12.05.2013]
12. http://www.gesetze-im-internet.de/englisch_ao/index.html [accessed on 12.06.2013]
13. http://www.cdep.ro/pls/legis/legis_pck.frame [accessed on 17.09.2013]
14. http://www.expert-monitor.ro/LexMonitor/Demo/index.jsp [accessed on 17.09.2013]

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of Economics and Issue 2(18),
Public Administration 2013

DETERMINANTS OF PATIENT SATISFACTION (PS) IN PUBLIC


HEALTH SERVICE ORGANIZATIONS (PHSO) IN EASTERN
PROVINCE OF SRI LANKA
Mr. Mohideen Bawa Mohamed ISMAIL, Ph. D. Research Scholar
Faculty of Graduate Studies, University of Jaffna, Sri Lanka
mbmismail1974@gmail.com

Prof. Thirunavukkarasu VELNAMPY
Dean/ Faculty of Management Studies & Commerce, University of Jaffna, Sri Lanka
tvnampy@yahoo.co.in

Abstract:
Satisfaction is satisfying the needs and desires of the consumer (Besterfield, 1994). In case of public health
service organizations, patient satisfaction is vital. Research attempts to determine factors affecting patient satisfaction in
PHSOs; know the reliability and validity of items & factors of patient satisfaction and create a mathematical equation
model for factors of patient satisfaction. Researcher selected 100 employees from only 3 government hospitals in
Addalaichenai Divisional Secretariat of Ampara District. Data have been collected during the period of first quarter of
2013. Collected questionnaires have been analysed by a factor analysis and regression analysis. Core services, human
element, non- human element and servicescape factors have been factors have been identified as determinants of patient
satisfaction in public health service organizations. Cronbach alpha for core service, human element of the service, non-
human element of the service and servicescapes are 0.819, 0.626, 0.965 and 0.783 respectively. Most of the items in
factors have higher validity. Values of KMO for items of core service, human element of the service, non- human
element of the service and servicescapes are 0.500, 0.554, 0.697 and 0.610 respectively. These values indicate that
content and convergent validity are higher. Discriminant validity are lower statistically. In this study, Log log model is
the best fitted model than linear models since core services, human element of the service and non- human of the
service factors in the model explain 94% of total variation for patient satisfaction.

Key words: Eastern Province, Patient Satisfaction, Public Health Service Organizations, Sri Lanka.

JEL classification: M12

1. INTRODUCTION

Eastern Province (EP) of Sri Lanka consists of three cardinal districts such as Ampara,
Batticaloa and Trincomalee. Public health service organisations (PHSO) are all sorts of government
medical institutions (GMIs) that are government hospitals (GHs). Satisfaction is satisfying the
needs and desires of the consumer (Besterfield, 1994). Ahmad, Nawaz, Khan, Khan, Rashid and
Khan (2011) studied about predictors of patient satisfaction. Patient satisfaction is a multi-
factorial concept. The results also found that patient satisfaction is determined by the predictors
such as attitude about hospital services and satisfaction from staff. Holder and Berndit (2009) found
the effect of changes in servicecapes and service quality perceptions in maternity ward patients in a
private hospital with the help of SERVPERF instrument to determine perceptions of service quality.
On this basis, patients can be satisfied by way of core services, human element, non- human
element and servicescape factors. The population of Sri Lanka in 2003 was estimated at 19.25
million. The annual population growth rate was reduced to its current 1.3% level with an increase in
Life Expectancy at birth. Sri Lanka is aging rapidly (Department of Census & Statistics, 2001). It is
projected that by 2020, 20% of Sri Lanka’s population will be 60 years of age or over, while the
proportion in the young age group is decreasing. Sri Lanka’s progress in health and social
development can be seen in the vital health outcomes. The Infant Mortality Rate (IMR) has declined
steadily since the beginning of the last century (11.2 per 1,000 live births – 2003) while the
Maternal Mortality Ratio (MMR) steadily declined until 1992 but remained stagnant thereafter (47
per 100,000 live births – 2001). However, there was significant district variation in IMR and MMR.
Batticaloa and Trincomalee of Eastern Province were among the top ten in maternal deaths in
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Island. Batticaloa, Trincomalee and Ampara of Eastern Province had 116.1, 60.3 and 31.8 maternal
deaths per 100, 000 live births during the past (World Health Organization, 2006). These
demographic, economic and socio- cultural situations highlight that patients in public health service
organizations should be satisfied.

2. STATEMENT OF THE PROBLEM

Oyvind, Sjetne and Iversen (2012) studied about overall patient satisfaction with hospitals in
relation to the effects of patient-reported experiences and fulfillment of expectations. Patient
satisfaction and experiences are important parts of healthcare quality, but patient expectations are
seldom included in quality assessments. Results found two variables are about fulfillment of
expectations and eight are about patient-reported experiences and three are socio-demographic
variables. Borghans, Sophia, Rudolf and Gert (2012) studied about whether there is the length of
stay [LOS] in hospital correlated with patient satisfaction. Research design used standardized LOS
and standardized patient satisfaction data from seven specialisms such as internal medicine,
cardiology, pulmonology, neurology, general surgery, orthopaedic surgery and obstetrics and
gynaecology in the period 2003–2010. They found no correlation between LOS and patient
satisfaction in six out of seven specialties. They only found significantly higher patient satisfaction
scores in pulmonology for some specific items on hospitals wards with a shorter LOS. You, Linda,
Douglas, Liu, He, Hu, Jiang, Li, Li, Liu, Shang, Lee and Sermeus (2012) studied about hospital
nursing, care quality and patient satisfaction with reference to cross-sectional surveys of nurses and
patients in hospitals in China and Europe. Nurses in both China and Europe described their work
environment, the quality of care on their unit and patient safety as the determinants for patient
satisfaction in different degrees. So, these empirical evidences suggest that there may be a variety of
determinants that generate satisfaction for patients. There is a room for further investigating about
factors determining patient satisfaction. These studies have been carried out in different contexts, in
different countries and in different periods. Findings of these studies are different. Factors identified
these studies also different. Therefore this study is undertaken in the performance of public health
service organization specially, in government hospitals in Eastern Province of Sri Lanka during the
period of 2011 to 2014.

2.1 RESEARCH QUESTIONS AND OBJECTIVES

Empirical review of literatures of previous studies confirms that research issue exists on
determinants of patient satisfaction in public health service organization i.e. government hospitals.
This main research issue is cascaded into three sub research questions. They are; first is what
factors influence patient satisfaction in public health service organizations. Second is whether these
items & factors of patient satisfaction are reliable and valid?. Third is it possible to create a
mathematical equation model for factors of patient satisfaction. These three research questions are
converted into research objectives. They are; first is to determine factors affecting patient
satisfaction in PHSOs. Second is to know the reliability and validity of items & factors of patient
satisfaction. Third is to create a mathematical equation model for factors of patient satisfaction.

3. NEED FOR THE STUDY

Job satisfaction experienced by employees will include the people to give their best to the
organization (Velnampy, 2008). Incentives have a significant effect on employees’motivation
(Velnampy,2006).Reichheld (1996) denoted that customer satisfaction is the key factor for
organizational success. On this basis, it is true that if public health service organizations want to be
successful patient satisfaction is vital. Service quality and customer satisfaction are inarguably core
concepts that are in the crux of the marketing theory and practice (Spreng and Mackoy, 1996).
Customer satisfaction leads to higher customer loyalty (Anderson and Sullivan, 1993; Boulding et.

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al., 1993). Patients are satisfied they may be loyal to public health service organizations. Public
health service organisations should provide better service quality for satisfying patients. When
patients are satisfied they can spread positive word of mouth about hospitals and staff. This
situation may lead more allocation of funds and infrastructures. Findings of this study may be useful
to hospital managers and executives to better serve to customers in future. According to the societal
marketing concept, when public health service organizations satisfy patients it can serve to society.
Society can have healthy and wealthy workforce that should help for higher economic growth of a
country. This study is beneficial to staff who work in public health service organizations. Satisfied
patients can recommend with top authorities to sort out the needs and wants of the staff. Using
factor analysis, Velnampy and Sivesan (2013) assessed the service quality of university libraries in
Sri Lanka. This study analyzed twenty three variables which measure the service quality of
university libraries and finally extracted four factors using factor analysis, namely convenient
opening hours, current information, collection comprehensiveness, and convenient access to
collection. Velnampy and Sivesan (2012) in their research on determinants of customer relationship
marketing of mobile service providers in Sri Lanka extracted three factors namely trust, rapport and
accuracy using factor analysis. In another study of (Velnampy and Sivesan, 2012), they extract from
the analysis that together accounted 84.924% of the total variance. These factors were categorized
as payment, achievement and proud to work.

4. REVIEW OF LITERATURE

Qunxiang, Peng and Lihua (2012) studied about the investigation of patients' satisfaction
degree with public hospitals in the city of Hangzhou under the background of new medical reform.
They made questionnaire survey on 200 patients randomly selected from 4 public hospitals in
Hangzhou and analyzed the data with descriptive statistics and regression analysis. The score of the
general satisfaction degree of the patients is 3.68.The main factors affecting the patients' general
satisfaction degree with hospitals are the professional skills of medical workers and medical costs.
When implementing and progressing new medical reform the patients' general satisfaction degree
with hospitals is fine to show the great space in improvement. Dasanayaka, Gunasekera, and
Sardana (2012) studied about quality of healthcare service delivery in public sector hospitals which
was a case study based on western province in Sri Lanka. This study was conducted in Colombo,
Gampaha and Kalutara districts in Western Province in Sri Lanka. A structured questionnaire
survey based on SERVQUAL model related to healthcare and situation analysis based on in–depth
interviews were carried out. The findings of this study indicated that there is a large gap between
the expectations of the patients and the perceived services. These gaps are high in rural, peripheral
hospitals compared with the teaching, national and base hospitals in urban areas. Nurunnabi and
Islam (2012) studied about accountability in the Bangladeshi privatized healthcare sector. Research
design was that data were collected from 533 patients using services in 45 Dhaka city privatized
hospitals. A questionnaire was designed based on 60 patient focus study group and the literature.
Findings showed that structural equation modeling provides a comprehensive picture that allows
healthcare constructs and accountability to be tested. The goodness-of-fit statistics supported the
four factors of professionals, administration & management, legal enforcement, ethics &
government which were significantly associated with patient accountability. Literature review
identified core services, human element, non- human element and servicescape as factors for patient
satisfaction.

5. CONCEPTUAL MODEL

A conceptual model has been created by researcher using identified factors for patient
satisfaction. This model can be justified by several reasons. This model is a result of detailed and
thorough literature review. Factors and measures have been taken from well- known, widely used

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and generally accepted models. Patient is based on SERVQUAL and SERVSUPERF instruments.
This conceptual model is shown in figure 1.

Figure 1: Conceptual model for patient satisfaction in public health service organization

(Source: Review of literature)

6. OPERATIONALISATION OF STUDY

Operationalisation for patient satisfaction in public health service organizations is shown in table 1.

Table 1: Operationalisation for patient satisfaction

Concept Factors Measures Number of


measures
Core service Core benefit, problem solving and core feature 03
Human element of the Reliability, responsiveness, assurance, recovery, 06
service empathy, critical incidence
Patient Non- human element Process, procedure, system 03
satisfaction of the service
Servicescapes Sign/ symbol, space, layout of units, interior décor, 03
exterior décor, entertainment/ music, food, condition
of bed sheet & pillow
(Source: Literature review)

7. METHODOLOGY

Data collection is made using secondary source and primary source. Secondary source was
used for literature review. Primary data have been collected using questionnaire.

7.1 DATA COLLECTION

Data are collected in both secondary and primary sources. Literature review was carried out
using secondary data collection. Researcher collected 39 articles from patient satisfaction in public
health service organisations’ performance. Secondary source of data collection was made to collect
articles during the period of 2012 to 1999. Data have been collected from primary source using
questionnaire as an instrument. Questionnaire was prepared in English language first. Then, it is
translated into Tamil. Research translated questionnaire from English version to Tamil version on
his own with the assistance of the supervisor. Pilot study has been conducted to test the

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questionnaire in selected government hospitals in Addalaichenai Divisional Secretariat, Ampara


District, Eastern Province of Sri Lanka.

7.2 SAMPLING UNITS (SUS)

Primary sampling units (PSUs) are all government hospital units in all three Districts of
Eastern Province. There 65 government hospitals in Eastern Province. Ampara, Batticaloa and
Trincomalee districts consist of 29, 18 and 18 government hospitals respectively. Sample size has
been determined using the sample size formula. Primary sampling units (PSUs) are research sites
i.e. government hospitals where research is carried out. Researcher wished to know how many
government hospitals have to be taken from these 65 government hospitals as primary sampling
units. He estimated mean number of government hospital units more precisely so that the estimate
will be within ± 2 government hospitals of mean number of true population of government
hospitals. The following formula is used to calculate sample size of government hospital units.
n = σ2 * z2 ………………………………………………………………………….….formula (1)
D2 (Source: Malhorta, 2002). Where; σ2 = variance of the population number of
2
hospitals. z = z value associated with 95 % of the confidence level. Associated z value is 1.96. Of
the 65 government hospitals, 39 government hospitals have to be taken as sample size for the study
in Eastern Province. 17, 11 and 11 government hospitals have to be taken in Ampara district,
Batticaloa district and Trincomalee district of Eastern Province respectively. Pilot study should be
undertaken with a limited sample size. Since this is a pilot study researcher selected only 3
government hospitals in Addalaichenai Divisional Secretariat of Ampara District.
Secondary sampling units are patients who get treatments from these 3 government hospitals.
Hospitals hesitate to provide the records of patients. However, researcher collected data of bed
capacity. Sample size of SSUs is calculated using sample size formula. There are 5069 beds in all
65 hospitals. Researcher wishes to know how many beds (in- patients) to be sampled. Researcher
wants to estimate mean/ average number of beds for in- patients more precisely so that the estimate
will be within ± 30 beds (in- patients) of true population number of beds (in- patients). The
following formula is used to calculate sample size of beds (in- patients). It is assumed that all beds
are occupied at all times for in- patients.
n = σ2 * z2 ……………………………………………………………………………..formula (1)
D2
Where; σ2 = variance of the population number of beds. It is known to the researcher from
secondary data analysis i.e. Annual Health Bulletin (2010). z2 = z value associated with 95 % of the
confidence level. Associated z value is 1.96. Researcher is confident that 95 % of mean/ average
number of sample beds fall in the acceptance region. Researcher is confident that 5 % of mean/
average number of sample beds fall in the rejection region. Therefore, researcher is confident that
95 % mean/ average number of beds in true population fall in the acceptance region. Researcher is
confident that 5 % mean/ average number of beds of population fall in the rejection region. D2 =
Maximum permissible difference between sample number of beds and population number of beds.
Of the 5069 beds in 65 hospitals, 608 beds in 55 hospitals should be taken as sample size of SSUs.
These 608 beds represent 608 in- patients. In case of out- patients, a same amount of out- patients
should be considered for research. Totally, 1216 patients should be considered for the research.
Since this is a pilot study researcher selected only 100 patients from both in and out patients out of
3 selected government hospitals in Addalaichenai Divisional Secretariat of Ampara District.

7.3 DATA SOURCE, PERIOD AND ANALYSIS

Primary source of data collection have been made to collect questionnaires from hospital
employees. A questionnaire has been prepared using identified measures above. Questionnaire
consists of two sections such as personal & demographic variables of patients and patient
satisfaction in PHSOs. Instrument- questionnaire is scaled in 5 point likert- scale. Patient

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satisfaction in public health service organizations are scaled in agreement scale ranging from 5 to 1.
Collected questionnaires have been cross checked and used as input for processing in SPSS. Data
have been collected during the period of first quarter of 2013. Collected questionnaires have been
analysed by a factor analysis and regression analysis.

8. RESULTS AND DISCUSSION OF FINDINGS

8.1 RELIABILITY AND VALIDITY

Cronbach alpha is most widely used method for checking the reliability of scale. It may be
mentioned that its value varies from 0 to 1 but, satisfactory value is required to be more than 0.6 for
the scale to be reliable (Malhorta, 2002; Cronbach, 1951). In this study, researcher use Cronbach
alpha scale as a measure of reliability. Core service factor is comprised of core benefit, problem
solution and features. Cronbach alpha for features was also high. But, this was not taken into grant
due to communality value of less than 0.6. Values of Cronbach alpha for the 2 items of core benefit
and problem solution are 0.819. Human element of the service factor is composed of reliability,
responsiveness, assurance, recovery, empathy and critical incidence. Cronbach alpha for reliability
and empathy were also high. But, these were not taken into grant due to communality value of less
than 0.6. Cronbach alpha for these 4 items is 0.626. Non- human element of the service factor is
composed of process, procedure, system and technology. Cronbach alpha for these 4 items is 0.965.
Servicescapes is composed of signs & symbols, space, layout of units, interior décor, exterior décor,
music, food and conditions of bed sheets & pillow. Cronbach alpha for these 8 items is 0.783.
Reliability statistics are shown in table 2.

Table 2: Reliability statistics


Factors Value of Cronbach's Alpha N of items N of items
Core service 0.819 3 2
Human element of the service 0.626 6 4
Non- human element of the 4
service 0.965 4
Servicescapes 0.783 8 8

8.2 COMMUNALITIES AND TESTING THE SUFFICIENCY OF SAMPLE SIZE

Researcher tested collected data for appropriateness for factor analysis. Appropriateness of
factor analysis is dependent upon the sample size. In this connection, MacCallum, Windaman,
Zhang and Hong (1999) have shown that the minimum sample size depends upon other aspects of
the design of the study. According to them, as communalities become lower the importance of
sample size increases. They have advocated that if all communalities are above 0.6 relatively small
samples (less than 100) may be perfectly appropriate. In this regard, communalities for core benefit
(0.849) and problem solution (0.849) are more than 0.6. Since communality features was less than
0.6 so, it was not taken into grant. Communalities for responsiveness (.973), assurance (.701),
recovery (.899) and critical incidence (.756) are greater than o.6. Communalities for process (.963),
procedure (.861), system (.905) and technology (.915) are greater than 0.6. Communalities for signs
& symbols (.742), space (.849), layout of units (.873), interior decor (.813), exterior decor (.874),
music (.938), food (.859) and conditions of bed sheets & pillow (.850) are greater than 0.6.
Communalities are shown in table 3.

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Table 3: Communalities
Core Values of Human Values of Non- Values of Servicescapes Values of
service Communality element of the Communality human Communality Communality
factor (Extraction) service (Extraction) element of (Extraction) (Extraction)
the service
factor
Core Responsiveness Process Signs &
0.849 0.973 .963 .742
benefit symbols
Problem Assurance Procedure Space
0.849 0.701 .861 .849
solution
Recovery System Layout of
0.899 .905 .873
units
Critical Technology Interior decor
0.756 .915 .813
incidence
Exterior
.874
decor
Music .938
Food .859
Conditions of
bed sheets & .850
pillow

8.3 MEASURE OF KEYZER-MEYER-OKLIN (KMO)

Measure of Keyzer-Meyer-Oklin (KMO) is another method for to show the appropriateness


of data for factor analysis. KMO statistics varies between 0 and 1. Keyzer (1974) recommended that
values greater than 0.5 are acceptable; between 0.5 to 0.7 are moderate; between 0.7 to 0.8 are
good; between 0.8 to 0.9 are superior (Field, 2000). Bartlet’s test of sphericity is the final statistical
test applied in this study for verifying its appropriateness (Bartlet, 1950). In this study, values of
KMO for 2 items of core service factor, 4 items of human element of the service factor, 4 items of
the non- human element of the service and 8 items of servicescapes
0.500, 0.554, 0.697 and 0.610. These values indicate sample taken to process factor analysis is
statistically significant. In addition to KMO, Chi- square values for core service factor, human
elemnt of the service, non- human element of the service and servicescapes are 64, 157, 628 and
559 with significance value of 0.000. These values confirm test is statistically significant when
significance value is less than significance level. Significance value is 0.000 at 5% level of
significance. These values indicate that data are statistically significant for factor analysis. Values
of KMO and Bartlet test of Sphericity are shown in table 4.

Table 4: KMO & Bartlett’s Test of Sphericity

Core Human Non- Servi


service element of human cesca
factor the service element of pes
factor the service
factor
Kaiser- Kaiser- Kaiser- Kaise
Meyer- Meyer- Meyer- r-
Olkin Olkin Olkin Meye
Measure Measure Measure r-
of of of Olkin
Sampling .500 Sampling .554 Sampling .697 Meas .610
Adequacy. Adequacy. Adequacy. ure of
Samp
ling
Adeq
uacy.
Bartlett's Approx. 64.972 Bartlett's Approx. 157.335 Bartlett's Approx. 628.686 Bartle Appr 559.3

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Test of Chi- Test of Chi- Test of Chi- tt's ox. 41


Sphericity Square Sphericity Square Sphericity Square Test Chi-
of Squa
Spher re
icity
Df 1 Df 6 Df 6 Df 28
Sig. .000 Sig. .000 Sig. .000 Sig. .000

8.4 FACTOR ANALYSIS

After examining the reliability of the scale and test appropriateness of data as above,
researcher carry out factor analysis to know factors affecting corporate performance of Public
Health Service Organisations in Eastern Province of Sri Lanka and to select an appropriate
regression model for Public Health Service Organisations in Eastern Province of Sri Lanka. For
achieving these objectives, researcher employs principal component analysis (PCA) that is followed
by the varimax rotation. Varimax rotation is mostly used in factor analysis (Hema and Anura,
1993).
From table, it can be seen that core service factor has one component. This component is
extracted from the analysis with an eigen value greater than 1 (Tabachnick and Field, 1996). In this
study, this one component of core service factor explains 85% of the total variation. Two
components of human element of the service factor explain 83% of the total variation. One
component of non- human element of the service factor explains 91% of the total variation. Three
components of servicescapes explain 85% of the total variation. Total variation is explained in table
5.
Table 5: total variation
Human element of the service Non- human element of the service Servicescapes
Core service factor factor factor
Cum
Com % of % of ulati % of
Comp Tota % of Cumul pone Tota Varian Cumul Compone Tota Varian ve Compo Vari Cumul
onent l Variance ative % nt l ce ative % nt l ce % nent Total ance ative %
1 1.69 1 2.29 1 3.64 91.0 1 42.0
84.873 84.873 57.280 57.280 91.096 3.367 42.090
7 1 4 96 90
2 1.03 2 28.2
25.953 83.233 2.258 70.309
8 19
3 14.6
1.174 84.988
79

8.5 MODEL SELECTION

Gujarati, Porter and Gunasker (2012) stated that Variation Inflation Factor (VIF) should be
less than 10 and Durbin Watson (DW) should be between (dL ≤ d ≥ du) i.e. 1.020 to 1.920 for a
model selection. In this study, Log Log model has less than 10 for VIF and 2.28 for DW. Thereby,
researcher selects this model as the best fitted model for his study. Results are shown in table 6

Table 6: Selection of model


Models Type R2% F statistics P Values of VIF DW Selected
of the [MSx/MSerror] model
model
PATIENSATISFACTION Linear 100.0% 2310298/0 0.000 1.100, 1.713, 0.0593452
= - 0.000000 + Linear 1.152 & 1.709
0.000000 CORE
SERVICE + 0.407
HUMAN ELEMENT OF
THE SERVICE +
0.291 NON-HUMAN

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ELEMENT OF THE
SERVICE + 0.409
SERVICESCAPES
PATIENT Log 94.1% 365.03 0.000 1.100, 1.713, 0.490798
SATISFACTION LOG = Linear 1.152 & 1.709
6.23 - 0.00557 model
CORE SERVICE -
0.0132 HUMAN
ELEMENT OF THE
SERVICE + 0.000234
NON-HUMAN ELEMENT
OF THE SERVICE +
0.000300
SERVICESCAPES
PATIENT Log 94.1% 377.23 0.000 1.094,1.007,1.109 2.27035 √
SATISFACTION LOG = Log & 1.103
- 0.00086 + 0.0121 model
CORE SERVICE LOG +
0.0303 HUMAN
ELEMENT OF THE
SERVICE LOG + 0.455
NON-HUMAN ELEMENT
OF THE SERVICE LOG
+ 0.404
SERVICESCAPES LOG

9. CONCLUSIONS

As promised in the research objective section, my first objective is to determine factors


affecting patient satisfaction in PHSOs. Core services, human element, non- human element and
servicescape factors have been factors have been identified as determinants of patient satisfaction in
public health service organizations. Second objective is to know the reliability and validity of items
& factors of patient satisfaction. Core service factor is comprised of core benefit, problem solution
and features. Cronbach alpha for features was also high. But, this was not taken into grant due to
communality value of less than 0.6. Values of Cronbach alpha for the 2 items of core benefit and
problem solution are 0.819. Human element of the service factor is composed of reliability,
responsiveness, assurance, recovery, empathy and critical incidence. Cronbach alpha for reliability
and empathy were also high. But, these were not taken into grant due to communality value of less
than 0.6. Cronbach alpha for these 4 items is 0.626. Non- human element of the service factor is
composed of process, procedure, system and technology. Cronbach alpha for these 4 items is 0.965.
Servicescapes is composed of signs & symbols, space, layout of units, interior décor, exterior décor,
music, food and conditions of bed sheets & pillow. Cronbach alpha for these 8 items is 0.783.
Keyzer-Meyer-Oklin (KMO) is used to know statistical validity of factors. In this study, values of
KMO for 2 items of core service factor, 4 items of human element of the service factor, 4 items of
the non- human element of the service and 7 items of servicescapes 0.500, 0.554, 0.697 and 0.610.
These values indicate sample taken to process factor analysis is statistically significant. Content and
convergent validity are higher. Discriminant validity are lower statistically. Third objective is to
create a mathematical equation model for factors of patient satisfaction. In this study, Log log
model is the best fitted model than linear models. In terms of this model, core services, human
element of the service and non- human of the service factors explain 94% of total variation for
patient satisfaction.

10. LIMITATIONS AND OPPORTUNITIES FOR FURTHER RESEARCH

This research is based a pilot study that depended on small number of sample size. This study could
be expanded to a larger sample size that covers Eastern Province.

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11. ORIGINALITY

This study fills the literature gap. In Sri Lanka, previous studies related to corporate performance in
both health service organizations and in non- health service organizations are poor. Limited number
of researches are found in Public Health Service Organisations in foreign and Sri Lanka. This
literature gap motivated researcher to research PHSOs in Sri Lanka. A conceptual model has been
created using identified factors for public health service organization. Reliability and validity have
been tested statistically. Mathematical modeling has been generated.

12. Acknowledgement
I acknowledge to Prof. Thirunavukkarasu Velnampy, Dean/ Faculty of Management Studies &
Commerce, University of Jaffna, Sri Lanka for the first instance for his valuable supervision and
guidance during my study. Many of the Senior Academics of from Department of Management,
Faculty of Management and Commerce, South Eastern University of Sri Lanka not only encouraged
me to pursue Ph. D. but also to write and publish research articles in Management field. I thank
them all. South Eastern University of Sri Lanka funded me partially for reading my Ph. D. This is
both self- funded and partially institutionally funded Ph. D. I thank for my parent, family members,
relatives and others for their timely financial assistances from the inception of Ph. D. programme to
now. I am immensely indebted to my family members in this financial regard. This research study is
part of my Ph. D. I acknowledge that the article is my original contribution and has not been
plagiarized/ copied from any source/ individual. I have properly cited and referred all citations and
references in my research paper. Further, I have been duly acknowledged at the appropriate places
to the best of my knowledge.

13. REFERENCES

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4. Besterfield, D. H. (1994), “Quality control”, Prentice Hall, Englewood, Cliffs, NJ.
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6. Boulding, W., Kalra, A., Staelin, R. and Zeithaml, V. A. (1993), “A dynamic process model
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8. Cronbach, L. J. (1951), “Coefficient Alpha and the Internet Structure of the Tests,
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10. Department of Census & Statistics (2001), “Population characteristics:: Census of population
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11. Department of Health (2010), “Annual Health Statistics”, Medical Statistics Unit, Ministry
of Health and Nutrition, Sri Lanka.
12. Field, A. (2000), “Discovering statistics using SPSS for windows”, London, Sage
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13. Gujarati, D. N., Porter, D. C. and Gunasker, S. (2012), Basic Econometrics, 5th edition, Tata
McGraw Hill Education Private Limited, New Delhi.
14. Hema, W. and Anura, D. Z. (1993), “A factor analytical study of the determinants of success
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16. Ismail, M. B. M. (2013), “Determinants of Employee Satisfaction (ES) in Public Health
Service Organizations (PHSO) in Eastern Province of Sri Lanka: A Pilot Study”, Working paper.
17. Ismail, M. B. M. (2013), “A Pilot Study of Determinants of Corporate Performance (CP) in
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Score Card (BSC)”, Working paper.
18. Ismail, M. B. M. (2013), “Corporate Performance (CP) and Satisfaction in Public Health
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19. Kaizer, H. F. (1974), “An Index of factorial simplicity”, Psychometrica, Vol. 39, pp. 31 – 36
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analysis”, Psychological Methods, Vol. 4 pp. 84 - 99
21. Malhorta, N. K. (2002), “Marketing Research: An Applied Orientation”, 3rd edition, New
Delhi, India, Pearson Education Asia.
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23. Oyvind, A. B., Sjetne, I. S. and Iversen, H. H. (2012), “Overall patient satisfaction with
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24. Qunxiang, Z., Peng, Y. and Lihua, Z. (2012), “Investigation of Patients' Satisfaction Degree
with Public Hospitals in the City of Hangzhou under the Background of New Medical Reform”,
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25. Reichheld, F. (1996), The Loyalty effect: The hidden force behind growth, profits and
lasting value, Bain & Company, Inc. Harvard Business School Press, Boston, MA.
26. Spreng, R. A. and Mackoy, R. D. (1996), “An examination of a model of perceived service
quality and satisfaction”, Journal of Retailing, Vol. 72, pp. 73 - 80
27. Tabachnick, B. G. and Field, L. S. (1996), “Using multivariate statistics”, New York,
Hcorper Collins.
28. Velnampy.T.(2008), Job attitude and employees performance of public sector organizations
in Jaffna district, Sri Lanka,GITAM Journal of Management,Vol.6,issue,2,pp 66-73.
29. Velnampy.(2006), A study on incentives and work motivation of public sector organizations
in Sri Lanka,Journal of Annamalai Business Review.
30. Velnampy,T., & Sivesan, S. (2012), Determinants of Customers Relationship Marketing of
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Libraries in Sri Lanka – an application of Servqual Model. Industrial Engineering Letters, 3(5), 40-
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32. Velnampy,T., & Sivesan,S. (2012), Determinants of Employees’ Job Satisfaction: A Study
of Banking Industries in Sri Lanka. Global journal of management and business research, 12(22),
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33. You, L. M., Linda, H. A., Douglas, M. S., Liu, K., He, G. P., Hu, Y., Jiang, X. L., Li, X. H.,
Li, X. M., Liu, H. P., Shang, S. M., Lee, A. K. and Sermeus, W. (2012), “Hospital nursing, care
quality, and patient satisfaction: Cross-sectional surveys of nurses and patients in hospitals in China
and Europe”, International Journal of Nursing Studies, Vol. 2. No. (12) pp. 00156-3.
35. World Health Organization (2006), WHO country Cooperation Strategy 2006 - 2011,
Democratic Socialist Republic of Sri Lanka, pp. 06, 06 – 07, 12.

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of Economics and Issue 2(18),
Public Administration 2013

LEADERSHIP APPROACHES REGARDING THE


ORGANIZATIONAL CHANGE
Associate professor Ph.D. Camelia BĂEŞU
Stefan cel Mare University of Suceava, 720229, Romania
cameliab@seap.usv.ro

Assistant Ph.D. Ruxandra BEJINARU
Stefan cel Mare University of Suceava, 720229, Romania
ruxandrab@seap.usv.ro

Abstract:
The purpose of the present paper is to capture the readers’ attention towards the relationship between different
styles of leadership and the process of implementing organizational change. Throughout the paper we debate issues like
the role of leadership in the moments the organization deals with radical changes; the importance of acknowledging the
necessity of change for the organization; the presentation of phases and possible effects of change; the correlation
between different leadership styles and phases of change. The paper approaches all issues systematically in order to
create logical connection of ideas that should be easy to comprehend for all readers, specialists and non-specialists.

Key words: change; leadership; leadership style; organizational change; resistance to change;

JEL classification: M12; M13; M19.

I. INTRODUCING THE ROLE AND IMPORTANCE OF ORGANIZATIONAL


CHANGE

Nowadays business trends are changing rapidly all over the globe and the organizations that
don’t change cannot survive. (Hage, 1999) Creating a change readiness climate within the
organization is the leaders’ job. Not only managers have to be prepared for any change process but
also employees. Employees’ readiness to accept and embrace change is critical for the process
success. Even if managers lead the organizations the transformation power lies within the people
that form the organizations and leaders may only try to stimulate and support the change.
Employees decide whether to work towards change or against it. If leaders want the success of the
organization then they have to prepare their employees for change. Leaders have to choose or re-
create the wright means to prepare, implement and sustain change. Until now, theorists and
practitioners have come with several methods, procedures, models and strategies applicable for
various contexts but customization is absolutely necessary for each case.
Change means, in the first place, to alter the present shape/estate in order to become a better
one. Change management is defined as the coordination of a structured period of transition from
situation A to situation B in order to achieve lasting change within an organization. (Bartkus, 1997)
In general, individuals focus more on what is that they have to give up when change occurs and not
on what they could gain. This is the main factor for the resistance that individuals manifest towards
change, which is rather paradoxical as any change is done for the good reasons.
A leader is a promoter of change that has to customize management styles according to the
features and behavior of their employees. A leading style is influenced by numerous factors and
may be analyzed from the managers’ position. The success of change depends on the way the
manager cooperates with employees and various collaboratives, on the way he stimulates the
employees to involve within the change process. (Bejinaru & Băeşu, 2013)
Organizational change refers to a set of actions that come to amend previous methods,
procedures, organizational behaviors or something else, through assigning some directions. The
organizational change consists in the set of different actions that results shifting in directions and/or
processes that affect the way in which organizations worked before. (Hage, 1999) The author argues

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that successful organizational change indicates the enhanced learning capabilities of an organization
which may lead an organization towards innovation. (Hage, 1999)
Questioning about what change is, what determines it and which are its purposes should make
things easier to understand how to manage change and profit from it. “Change is a constant; has
always been with us, and will continue to dictate reality. In fact change is reality.” (Beerel, 2009,
p.6)
Discussions about change share different perspectives like whether change is internally
determined or environmentally determined. In this sense Beerel (2009) argues that change should be
environmentally determined which means that the factors generating change are external to the
system changing. Other perspective useful to consider is whether change is a radical or an
incremental phenomena. In this case the question is if change is rather transformational then
evolutionary. A diplomatic and well-balanced answer is given by Beerel (2009) that “both types of
change occur simultaneously in a far less definable and controlled fashion than we like to imagine.”
(Beerel, 2009, p.8)

II. LEADERSHIP ROLE IN THE ORGANIZATIONAL CHANGE PROCESS

Nowadays the interest is focused upon the effects leadership generates for the organization.
Today managers consider leadership as an instrument with great potential for shaping the
organization, of course through directing the employees. Their attention turns toward the
determination of that style/model/strategy of leadership that should lead to the wanted results in a
certain context as in this case we refer to organizational change. (Bejinaru & Băeşu, 2013)
Leadership is a process of generating change, not maintaining the status quo. This change is not
imposed by the leader, but it is a sharing process of the same purpose and values. (Brătianu &
Anagnoste, 2011) Inside the organization, leaders must be promoters of change. Leaders have the
power to influence others and motivate them in order to achieve certain goals. A leader of change is
an individual with the ability to influence and ultimately change behaviors of employees, teams,
and/or organizations; an individual who influences the commitment of any key group within the
organization.
In many turns, we have observed that in practice leadership plays a central role when it comes to
implementing organizational change. The arguments in favor of this statement are many, as it
follows. According to Gardner (1993), leadership is the process of persuasion or example by which
an individual induces a person or a group to pursue objectives held by the leader or shared by the
leader and his or her followers. Considering this definition, then leadership style is the way in which
that process is carried out. “Change is toward an outcome that leader and followers both want a
desired future or shared purpose that motivates them toward this more preferable outcome. An
important aspect of leadership is influencing others to come together around a common vision.
Thus, leadership involves the influence of people to bring about change toward a desirable future”.
(Daft, 2008, p. 5)
Reviewing specialists’ opinions becomes obvious that initiation and coordination of a change
process always requires well developed leadership skills. Leading people through a change is an
arduous process along which may be encountered various levels of resistance. People have a natural
instinct to resist changes and especially they resist most to radical changes and it is only the leader’s
ability to overcome this. (Reardon, 1998)
The immediate resistance to change is generated by the person’s instinct but the rejection
aggressiveness is the result of taking things/change personally. The starting point to lower the
resistance force towards change of employees is to depersonalize the problem. “Depersonalizing the
problem decreases the emotional reactivity to the situation, which allows for, and even encourages,
change. Once the emotional reactivity has dissipated, the firm and employees are able to move into
the change mode. The ability to respond appropriately requires five essential skills: 1. Self-
awareness, 2. Emotional maturity, 3. Self-motivation, 4. The ability to show empathy, 5. The ability
to develop and maintain positive relationships.” (Balestracci, 2003 p. 42)

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Nowadays, the leader’s effectiveness resides in the capability to manage employee resistance
and mold their behavior towards the implementation of successful changes.
Even if this kind of process – change implementing- can be rigorously described, in practice it
becomes a real hardship. Some changes, like incremental changes are easier accepted and
implemented as these are gradually and informally applied. In time people get used to this kind of
changes and become a routine, unlike radical changes. In contrast, radical changes are much more
difficult to be accepted and resistance is stronger that is why are necessary true leadership
competencies. Radical changes require a certain level of acceptance in order to create willingness to
relinquish old styles of working in favor of new ones. (Reardon 1998)
In recent literature, specialists have extended the research and discussions about the leaders’
role in the organization to other in depth issues like the effects of different leadership styles upon
the process of implementing organizational change. Different leaders will have different views
about the innovation and will approach their role in facilitating implementation in different ways.
The views, styles, and behaviors of individual leaders should be understood, and system support
strategies should take these differences into account.
For example Higgs and Rowland (2000, 2001) have researched upon the link between several
styles of leadership and organizational change. In accordance with their results we present five
broad competency areas of leadership related to successful implementation of organizational
change:
 Creating the case for change – building awareness among employees regarding the
imminence of change and its necessity;
 Creating structural change – insistently working on people understanding the essence of the
specific change phenomena and providing its support through consistent tools and
processes;
 Engaging other – getting people involved and committed to run along the change process;
 Implementing and sustaining changes – elaboration strategies and development of effective
action plans and supervising the progress towards the desired change;
 Facilitating and developing capability – sustain people to find their own motivation for
achieving change.
There are some extremist theorists who argue that leading change is the fundamental role of a
leader and everything else is secondary. Yukl considers that a leader is only effective if he or she
succeeds to adapt the organization to a changing environment through continuous revitalization. He
emphasizes on understanding the reasons for resistance to change, the sequential phases in the
change process, and different strategies to change will greatly enhance its likelihood of successful
change implementation. (Yukl, G., 1998)

III.RELATIONSHIP BETWEEN LEADERSHIP STYLES AND IMPLEMENTATION


OF ORGANIZATIONAL CHANGE

We envision leadership styles like persons’ character styles or like personalities which in social
life design different behaviors. For this reason we shall further approach the relation between
different styles of leadership and organizational change in order to observe the effects on each
other.
There are two main leadership styles that literature refers to: transactional leadership and
transformational leadership. Transactional leadership style is characterized by the fact that the
leader acts like an agent of change and supports the employees through procedures of fundamental
changes that improve productivity. Transformational leadership style implies that the leader
empowers the subordinates to assume the organization’s vision which reflects into growth of
productivity, of employees’ motivation, of work satisfaction and of individual performance. (Burns,
1978)
According to Bass’s (1998) research, a big issue about transformational leadership is whether it
positively influences all organizational layers. In this case, the author suggests that it is necessary to

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continuously supervise and support the development of human capital and the enhancing of key
capabilities that will contribute to organizational success.
An important research instrument that was frequently used by specialists to observe the leaders’
style is the MLQ – Multifactor Leadership Questionnaire created by Bass and Avolio (1990). The
authors reveal four competency areas that ensure the success for a transformational leadership:
 Idealized behavior (IB) – it makes a leader to be trusted and respected;
 Inspirational motivation (IM) – the ability to stimulate employees to outrun themselves;
 Intellectual stimulation (IS) – leaders stimulate the employees to ask questions and to solve
old problems in new ways;
 Individual consideration (IC) – refers to the habit of listening the needs and wishes of
subordinates.
In 2004 a Gallup survey revealed that the strengths and weaknesses for a group of 782 top managers
were mostly the following:
- Strengths: integrity, ability to communicate, seriousness, intelligence, business knowledge,
leadership skills and education;
- Weaknesses: limited perspectives, incapacity to understand other members of the team,
incapacity of working with others, indecision, lack of initiative, lack of responsibility, lack
of integrity;
Higgs and Rowland identified three distinct groupings of change leadership behaviors. These were:
1. Shaping Behavior: the communication and actions of leaders related directly to the change;
‘making others accountable’; ‘thinking about change’; and ‘using an individual focus’.
2. Framing Change: establishing starting points for change; ‘designing and managing the
journey’; and ‘communicating guiding principles in the organization’. And
3. Creating Capacity: ‘creating individual and organizational capabilities’; and
‘communication and making connections’ (Higgs & Rowland, 2005)
Analyzing knowledge about leadership competencies, leaders’ strengths and weaknesses, and
change behaviors will lead to identifying pragmatic strategies to be applied through the change
process. The above observations built the conclusion that an effective leader relies on personal and
behavioral characteristics and on fine abilities to relate with others. Thus, leaders have to be
perfectly aware of the areas they are good at and the ones they have yet something to improve.
The standard structure of a change process is described through three main stages, well known
as Lewin’s model: unfreeze-change-refreeze. The change process starts with “unfreezing”, that
means the dissolving of existing systems. In a “fluid” estate, the organization may be easily
modeled, as it is more flexible. When organizational environment becomes more relaxed any
change will be assumed naturally, and shall not be perceived as something imposed. The third stage
of “refreeze” has to be understood as an end of a certain change procedure and not as a return to the
solid initial estate. This is Lewin’s approach to restructure one’s thoughts, perceptions, feelings and
attitudes. Lewin’s model of organizational change may be associated to a spiral movement as the
three stages infinitely succeed one another within the organization’s life.
Reardon and Rowe analyzed in more detail the phases of change, identified what effects each
phase produces and associated to every set of procedures a specific leadership style. We consider,
as the mentioned authors also did, that it is of great relevance and real help for promoters of change
to know how to act each step throughout the change process. It is nothing to be strictly respected
but leaders have at least to be aware of what might happen or should happen in order to successfully
complete the change protocol.
Observing Figure 1, below, we can notice the division of the change process into five phases.
For each phase there are emphasized the main actions and effects to be achieved and the third
column suggests the appropriate leadership style to be applied for each set of actions.
In order to understand the association or the link between the leadership styles and the change
phases we have to review and to point out each style’s specificity. We consider that these
leadership styles were named after the effects they generate through the leaders’ behavior.
Following we briefly describe what each style does. The commanding style – focuses on results,

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persuades by directing, makes changes rapidly and applies the tactic learning by doing. The logical
style – differentiates by its focus on innovation, persuades goals through pertinent explanations,
makes changes with great cautiousness, and gathers knowledge by studying. The inspirational style
– focuses on identifying and creating opportunities, achieves goals by growing employees’ trust,
makes radical changes and learns by permanently questioning upon various issues. The supportive
style – offers others consistently support and gets involved in activities, makes changes slowly and
learns by listening.
As we previously mentioned we continue by associating to each phase of change the appropriate
leadership styles and actions. Our work consists in the attempt to explain and match change phases
and leadership possible initiatives towards the change process. The planning phase refers to:
acquiring information, creating ideas, formulating strategy. For these phase should be applied
leadership styles like: the inspirational and logical styles. The planning phase has to base on big
doses of innovation and also on logic judgment. The planning phase is of fundamental importance
for any process. When approaching change, it is obvious why the planning phase consists in
innovation, explanation, studying, creating opportunities and permanent questioning. A good
planning should be done in complete awareness of all factors and targeting towards important goals.
The enabling phase refers to: convincing employees, empowering employees, assisting
employees, explaining the plans. This phase requires in different doses the following leadership
styles: logical, inspirational, and supportive. Along each phase, these characteristics of the
leadership styles combine in order to best accomplish the phase’s good progress.
Throughout the enabling phase there have to be found compatibilities between the existing
procedures and the new tasks. The right combination of the three leadership styles should develop
the expected results.
The launching phase refers to: implementation in steps, meeting goals, getting results, assessing
the progress. The success of this phase must be ensured by mixing the commanding and logical
style. This phase requires a more demanding approach as it represents the moment of launching the
plans and strategies for change and these must have a precise debut. This phase has to be managed
through the commanding and logical styles as they consist of directing and explaining, and of doing
and studying.
The catalyzing phase refers to: inspiring, energizing, and assisting. For the activities in this
phase should be applied the inspirational and supportive styles as these develop through exploiting
opportunities of change in order to accomplish positive goals. The supportive style has the role to
facilitate the work of employees and provide the necessary involvement of leaders by listening and
cooperating.
The maintaining phase refers to: overseeing the progress, guiding others, energizing, and
assisting. Leadership styles that give positive results throughout this phase are the logical,
inspirational, and supportive ones. The maintaining phase is also a complex one and needs a mix of
actions and tactics. The combination of the three styles provides the necessary guidance for
employees to continue the good work and gain more confidence along the way. Even if it is the
final phase, leaders have to continuously search for innovations. For this phase the style emphasis is
once again on people. “Persuasion becomes crucial. Persuasion calls for an ability to listen well
enough to know what matters to people.” (Reardon, K.K. & Rowe, 1998, p.139)
The above ideas form a consistent approach towards the relationship between the change
process and various leadership styles. As Reardon & Rowe (1998) state, it is impossible for a leader
to apply all leadership styles during implementing the change process but, in our view, is not
impossible that more leaders to apply certain leadership styles in order to ensure the optimal match
between style, skill, and capabilities and what is required by each situation. We consider that any
leader who would pay attention to these observations could succeed to design particular strategies
for implementing change.

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Figure 1 - Relationship between phases of change and leadership style


Source: (Reardon, K.K. & Rowe, 1998, p.134)

IV.CONCLUSIONS

Throughout the paper we focused on the leadership concept and its role for the organization’s
critical moments, like implementation of organizational change. We have presented some details
regarding the phases of the change process and argued about the necessary characteristics and
competencies that leaders should possess in order to face any challenge of change.
Whatever the style, leadership of change in simple or more complex settings entails: building
capability and capacity in a team through supporting employees to improve their talents; creating
conditions for learning to occur by ensuring personal and team working time; creating a climate
which encourages individual and organizational development through growing trust and confidence
attitudes among employees; emphasizes collaborative working by appreciating results of teams;
provides a focus for effects of innovation and change. Overall we consider that leadership styles
which base on support, facilitation and collaboration appear to be more successful in case of change
implementation. Leadership and change cannot be separated not in theory neither in practice as they
are interdependent.
Though each leader is characterized by mainly a style it is important for him/her to be aware of
all the other leadership styles. Even if it is difficult to switch from one style to another, being aware
of each style opportunities it is a great step towards applying what is best for each phase of change.
This final idea could represent a topic for another research work.
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V.REFERENCES:

1. Balestracci, D. (2003) Handling the human side of change, Quality Progress, vol. 36(11),
pp.38-45
2. Bartkus, B. (1997) Employee ownership as a catalyst of organizational change. Journal of
Organizational Change Management, 10(4), 331-344
3. Bass, B. M. (1998) Transformational leadership: Industrial, military, and educational
impact. Mahwah, NJ: Erlbaum
4. Bass, B. M., & Avolio, B. J. (1990) Training and development of transformational
leadership for individual, team, and organizational development. In R. W. Woodman & W.
A. Passmore (Eds.), Research in organizational change and development. Greenwich, CT:
JAI Press
5. Beerel, A. (2009) Leadership and Change Management, Sage Publications Ltd., pp.6
6. Bejinaru, R., Băeşu, C. (2013) Approaches to organizational change within modern
companies, The USV Annals of Economics and Public Administration, Volume 13, Issue
1(17), 2013
7. Brătianu, C. & Anagnoste, S. (2011) The role of transformational leadership in mergers and
acquisitions in emergent economies, Management & Marketing, Challenges for the
Knowledge Society, Vol. 6, No. 2, pp. 319-326
8. Burns, J.M. (1978) Leadership, New York: Harper and Row
9. Daft, R.L. (2008) The Leadership Experience, 4th Edition, Thomson South-Western, New
York
10. Gardner, J.W. (1993) On Leadership. New York: Free Press
11. Hage, J. (1999) Organizational innovation and organizational change, Annual Review of
Sociology, Vol. 25, pp. 597-622
12. Higgs, M and Rowland, D. (2005) All Changes Great and Small: Exploring Approaches to
Change and its Leadership. Journal of Change Management, Vol. 5, No. 2, pp. 121-151,
June 2005
13. Higgs, M. & Rowland, D. (2000) Building leadership change capability, Henley Working
Paper Series, HWP 2000/04
14. Higgs, M. & Rowland, D. (2001) Developing change leaders: assessing the impact of a
development program, Henley Working Paper Series, HWP 2001/06
15. Reardon, K.K, Reardon, K.J & Rowe, A.J. (1998) Leadership styles for five stages of radical
change inventory, pp129-146
16. Yukl, G. (1998) Leadership in Organizations, Prentice-Hall, Upper Saddle River, New
Jersey, 4th Edition

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of Economics and Issue 2(18),
Public Administration 2013

SECTION 3

ACCOUNTING – FINANCES

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Public Administration 2013

THE FORECAST OF BANKRUPTCY RISK USING ALTMAN MODEL

Lecturer PhD Mihai Bogdan PETRISOR


Alexandru Ioan Cuza University of Iasi, Romania, Faculty of Economics and Business Administration
mihai.petrisor@uaic.ro

Assistant PhD Dan LUPU
Alexandru Ioan Cuza University of Iasi, Romania, Faculty of Economics and Business Administration
danlupu20052000@yahoo.com

Abstract:
The manifestation of financial crisis leads to the appearance or the increase of the risk of bankruptcy.
Therefore, the analysis of bankruptcy risk interests a number of users (customers, organizations, financial institutions)
and itself the company, in preventing the financial difficulties encountered from the early stages of the degradation
process. This article explores the top 10 companies on the BSE during 2010-2011 period by using the Altman model for
the determination of those firms who may experience in a close period a higher risk of bankruptcy.

Keywords: risk of bankruptcy, Altman model, financial crisis, BSE

JEL classification: G17, G20

INTRODUCTION

Over time, it had been developed different methodologies for analysis of bankruptcy risk on
the one hand, because the number of users of such information (customers, organizations, financial
institutions) on firm performance and risks involved in economic activity has increased and
secondly, it proves extremely useful in preventing the difficulties encountered by companies from
the early stages of the degradation process.
The instruments and methods of financial analysis of the risk of bankruptcy can be (Balcaen,
2004):
1. The method of comparison or analysis of the dynamics of indicators, which involves the use of
indicators values (absolute values), whose dynamics is analyzed by reference:
- Financial statements of earlier years. This type of comparison (in time) allows analysis of
development and financial performance indicators such as turnover, operating results, capital, total
assets.
- Financial statements of other companies (comparision in space). An organization that registers low
levels of performance to competitors (in the same sector of activity and the same size) can present a
high risk of bankruptcy. Also, the record of performance below the industry average should lead to
enhanced surveillance activity.
2. The method of rates, which allows creation of links between indicators of accounts, indicators of
the results and indicators of financial condition and results account, complete comparative analysis
in time and space.
3. The method of financial flows emphasizes financial performance indicators, with which reflected
aspects of exploiting activity and its impact on cash, which is one of the main parts of the
depreciation of the financial situation of the company. Early analysis of financial flows provides
information about registered business difficulties.
4. The method of scores is a method for predictive risk analysis of bankruptcy and developed in
response to criticisms of the traditional methods of financial analysis, the method is based on rates
financial or nonfinancial.

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LITERATURE REVIEW

The scores method is an overall investigation of how creditworthy status of a firm in order
to determine possible risk event of bankruptcy. This method occupies an important position in
financial analysis and is based on discriminating analysis.
The ’’scoring’’ technique has its origins in the USA where, in the '50s is looking into the
relationship of causes and ways of manifestation of disease in medical research. It is a statistical
technique that helps to establish characteristics of the comments made on an object, phenomenon,
and process. The scores method was taken over by other disciplines including economic and
financial analysis, as Americans have used this method of assessing the risk to a company
belonging to a particular policy area.
The scores method is an external diagnostic method, which aims to measure the risk to
which they expose the investor, creditor and the trader himself in future work. In the context of
financial analysis, the observations were made on the basis of selected indicators, both vulnerable
and healthy business from financially point of view. The significance of indicators and their
combination depend on the specific interest of each user or analyst (Hillegeist, 2004).
  This combination of indicators lead to the construction of a linear function called "function
score" which is a forecasting tool, both to the management and external users.

Z=a1r1+a2r2+………….+anrn

Where: Ri = financial parameters set by users and ai = weights coefficients

The selection of financial indicators characterizing the reliability of operators should


consider their independence in function Z. A certain degree of correlation between the information
provided by financial ratios would result in recording the score obtained of the same influence on
the financial phenomenon analyzed.
  On each operator is assigned a value of the function Z which highlights the quality of
internal management in relation to the activity sector, offering an overview of activity.
To build a model analysis based on scores method takes up several stages:
1 - financial indicators are chosen that reflects best the financial health of an operator
2 - comparing selected indicators development on two categories of operators in the same line of
business, some in distress, and other financially healthy
3 - engaging in the development of predictive function Z by combining those financial ratios that
have a strong and constant action;
4 - Z function setting ranges from observations made on the activity or not, of the risk of
bankruptcy.
The use of financial indicators (indicators of efficiency, balance indicators, indicators of
solvency, management indicators) to predict the risk of bankruptcy is based on the fact that their
systematic deterioration reflects the difficulties in leading and managing that business.
An evolution of the score function models using financial and other non-financial
characteristics, over time, is shown in the table below.

Tabel no.1 Methods of establishing a predictive function


Nr.crt. Domain Author
1 Inclusion of other variables than the financial rates Peel (1986), Keasey (1987), Booth (1983),
Development of forecasting nonfinancial models for Reynolds si Miller (1989), Coper Gascon si
bankruptcy Woo (1991), Lussier (1995)
2 Study of the bankruptcy process Typical alternatives in Argenti (1976), Laittinen (1991)
the bankruptcy
3 Development of new statistical methods for estimate the Ohlson (1980) Gentry si Witheford (1987)
probability of bankruptcy
4 Analysis of the assumptions of the limits set methods Richardson si Davidson (1983), Karels si

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Prakash (1987)
5 Analysis of the effect of statistical Znijewsky (1984), Peel (1987)
simplification
6 Adjustement of financial ratios Mensah (1983), Bartezak (1985), Watson
(1986), Bear (1986, Aziz,Lawson (1988)
7 Increased attention to the influence of industry in which El Hennawy si Marris (1983)
are part the sample firms
8 Development of conceptual methods Sharma si Mahayou (1980)
9 Analysis of creditors’s environmental Keasey si Watson (1986), Houghton si
Woodleff (1987)
Source: Balcaen, S. Ooghe, H. (2004). 35 Years of studys on Business Failure: An Overview of the Classic Statistical
Methodologies and their Related Problems, Vlerick Leuven Gent Working Paper Series 2004/15

Bankruptcy assessment models were primarily based on examination of firms went


bankrupt, so by analyzing the causes of bankruptcy after its occurrence. Under these conditions it
sought to establish features both financial and non-financial, of those companies. Investors and
banks are concerned about the chances of success of businesses that need support and so they ask
forecasting models of business success. The practice showed that it paid too little importance to
non-financial aspects, which is one of the major limitations of national evaluation models of
bankruptcy. The focusing almost exclusively on information provided by financial indicators has
greatly reduced power forecasts of these models.

THE APPLICATION OF ALTMAN MODEL ON COMPANIES LISTED ON BSE

In economic theory was developed a number of models based on the scores method, of
which the most common are: Altman model, Conan Holder model and Bank of France Model.
One of the first feature score was developed in the United States by E.I. Altman
in 1968. He studied the informations from a broad sample of firms, both among those who failed
and those who survived. He found that analysis based on more than 5 variables, allowed the
provision of 75%, 2 years before of their bankruptcy. Financial analysts have tried to develop the
capacity for forecasting of initial model, so Taffler in Europe and Koh and Killoungh, created
analytical models Z with an increased capacity prediction.
The Altman model (Zeta Analysis - A new model to identify bankruptcy risk of corporations,
Journal of Banking and Finance, June 1968) conducted a multivariate analysis of bankruptcy using
multiple discriminating analyses.He combined the information provided by five rates constructing a
"function score" of the form (Altman, 1968):

Z=1.2X1+1.4X2+3.3 X3+0.6 X4+1.0 X5


Where:
X1 = Working Capital/Total Assets
X2 = Retained Earnings/Total Assets
X3 = Earnings before Interest and Taxes/Total Assets
X4 = Market Value of Equity/Book Value of Total Liabilities
X5 = Sales/Total Assets
Z = Overall Index or Score

In it, the variables X1 .... X5 are economic and financial indicators and coefficients which
are amplified indicators are static in nature and express in a significant way the variable weight or
importance in the economic logic of evaluation of bankruptcy risk.

Tabel no.2 The explanation of the financial rates in Altman Model


X1 = Working Capital/Total Assets The rate measures business flexibility and
shows the share of working capital in total
asset; as the result of this report is higher the allocation of
permanent sources in exploiting coverage is optimaler

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X2 = Retained Earnings/Total Assets Measure the capacity of internal financing


of the enterprise and therefore it is recommended that
value ratio is as higher
X3 = Earnings before Interest and Taxes/Total Assets The rate is as a rate of economic return or the rate of
efficiency using of assets, it is desirable to be as higher
X4 = Market Value of Equity/Book Value of Total Express indebtedness of the company
Liabilities by long-term loans, it is desirable to be as higher

X5 = Sales/Total Assets The rate is an indicator of efficiency of use


assets, expresses total asset turnover by sales; as the
company's activity is more efficient, the sales will be
higher, and assets will soon renew the turnover
Source: Altman, E. (1968). Financial Ratios, Discriminant Analysis, and the Prediction of Corporate Bankruptcy.
Journal of Finance, 23 (Sept.), 589-609

The companies studied were analyzed and classified by Z score value fixing the limit and a
second area of uncertainty as follows:
Z <1.8 bankrupt in a year;
1.81 ≤ Z ≤ 2,675 area of uncertainty at high risk of bankruptcy;
2.67 ≤ Z ≤ 2.99 the low risk of bankruptcy;
Z> 2.99 without the threat of bankruptcy.
Subsequently, Altman proposes a revised model to be applicable to private firms and non-
manufacturier:
Z = 0.0656 X1 + 0.0326 X2 + 0.0105 X3 0, 672X4
X1 = net working capital / total assets
X2 = retained profit to the firm / total assets
X3 = Operating profit / total assets
X4 = Market value of equity / total liabilities

Table no.3 Risk assessment based on Altman model (1968)


Z Score Company type Comments
2.99 Continued operation Superior limit
2.78 Continued operation
2.68 Continued operation
2.67 bankruptcy
2.10 bankruptcy
1.98 bankruptcy
1.81 bankruptcy Lower limit
Source: Altman, E. (1968). Financial Ratios, Discriminant Analysis, and the Prediction of Corporate Bankruptcy.
Journal of Finance, 23 (Sept.), 589-609

  In conclusion, interpretation score "Z" is this:


Bankruptcy 1.81> R> 2.99 – well positioned

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Figure 1 Interpretation of the model Altman Z score

Next we apply the Altman model the first 10 companies listed on BSE during the 2010-2011
period, separately for each year, to determine which firms can go bankrupt. 
  The year 2010 was an atypical year and lots of events and left their mark on the evolution of
the Bucharest Stock Exchange (BSE). Amid crisis emerging international markets, stock has seen
many corrections during the year, thus limiting its growth over the past years. The BET index,
which includes the top ten companies in the market during the year, saw an increase of only
22.05%, being the smallest in six years. Even in these conditions, the BET index first exceeded the
threshold of launching 10,000 points this summer, was boarded by significant increases in bank
securities and pharmaceutical component. The value of transactions on the Stock Exchange this
year reached a new high of 3.92 billion euros (13.8 billion lei), 40% higher than in 2006, while
market capitalization has advanced by 17,2%, to 24.6 billion euros (85.96 billion lei).
Applying the Altman model led to results presented in Table 4. All 10 companies have
values over the critical values of 1.81; 4 of them being over the superior limit of 2.99 (Petrom,
Biofarm, Dafora, BRD).

Table no.4 The application of the Altman model to10 companies BSE in 2010 (mil.RON)
Transil BRD Petrom Transgaz Rompetrol Transele Dafora Azom Biofarm Electr
vania ctrica ures omag
netica
Working 9180 19272 2110 262 2146 902 138 284 55 151
Capital
Total 13876 38965 20997 2605 4289 4045 368 523 166 182
Assets
Retained 180 1250 5850 986 2086 1569 41 23 38 13
Earnings
Earnings 403 1090 1964 271 -36 158 25 82 15 45
before
Interest
and
Taxes
Market 611 696 5664 117 2109 733 97 52 97 91
Value of
Equity
Book 12081 34532 2609 919 2216 1571 212 1173 38 24
Value of
Total
Liabilities
Sales 22706 49945 12284 1051 5475 2348 318 822 62 24
Z - score 2,6017 3,0246 3,0771 2,4747 2,1006 2,8006 2,978 2,831 2,938 2,292
Average Z score 2,7120 Standard deviation Z score 0,3323
Source: own calculations

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Petrom has the highest Z score of 3.07. The explanation of the very good situation of
company is on recent explosive evolution of international quotations of oil and gas, but it is
beginning to feel the positive impact of investments made in recent years for identifying and
exploiting new production capacities. In the profit and loss count of Petrom, we attended the
following significant developments: an advance of 34.86% of turnover; an increase of 17.63% of
operating revenue; a 161.01% increase in operating brut profit; financial profit up 112.21%; obtain
a net profit up 156.30% from the previous year.
The lower value of 2,29 belongs Electromagnetica, which is close to the critical value of
1.81 and that in the future may cause the company to have problem.
The average of 10 companies is 2.7120, which is close to a high value and higher value of
2.99. The standard deviation has a value of 0.332, which is also a good value.
The year 2011 was the black year in the history of the Bucharest Stock Exchange, most
issuers of decreasing market strong in the international financial crisis. The index of the Bucharest
Stock Exchange (BSE), BET, lost 70.5% in value in 2011, this is the biggest annual fall in index
history. The decrease in 2008 advanced practice canceled the last four years. All shares traded on
BSE in 2011, without exception, have ended with negative returns. The value of transactions with
shares registered on BSE in 2011 fell by 53% compared to the registered in 2010. The value of
transactions with shares listed on BSE fell by 50% in 2011 to 7.0 billion (EUR 1.9 billion). The
number of shares traded in 2008 fell by only 9.7% and the number of transactions dropped by
13.2%.
Applying the Altman model led to results presented in Table 5. 8 companies have values
over the critical values of 1.81; only one of them being over the superior limit of 2.99 (Biofarm).
The Biofarm business climbed by 9% this year and the company's profit was maintained at a similar
level, from 9.3 million (2.2 million euros). This in the condition that most companies on the Stock
Exchange recorded significant decreases in the same period of business, many passing loss. The
liquidity of Biofarm fell from 26 million RON to 23.6 million RON, while receivables increased by
44% to 27.5 million RON. Biofarm is the only pharmaceutical company of the three who reported
profit and business growth this year. Biofarm shares registered the largest increase of the Stock
Exchange in this year, 205%.

Table no.5 The application of the Altman model to10 companies BSE in 2011 (mil.RON)
Transilva BRD Petrom Transgaz Rompe Transelec Dafora Azomures Biofarm Electro
nia trol trica magneti
ca
Working 10947 26608 1638 250 1840 1074 136 344 68 41
Capital
Total 17014 49239 24799 3278 4269 4375 473 610 146 88
Assets
Retained 203 1245 6366 1841 2090 1595 75 29 39 13
Earnings
Earnings 470 1614 1605 280 17 204 27 129 14 -70
before
Interest
and
Taxes
Market 1059 696 5664 117 2109 733 97 52 109 94
Value of
Equity
Book 14646 44768 4950 932 2672 1851 301 1202 15 15
Value of
Total
Liabilities
Sales 24293 57688 17399 1138 8678 2955 299 1293 66 8
Z - score 2,423 2,473 2,040 1,89 2,72 1,972 1,886 1,847 4,061 1,497
Average Z score 2,281 Standard deviation Z score 0,721
Source: own calculations

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2 companies are close to the critical value of 1.81 (Transgaz and Azomures). The company with the
lowest value last year, continues its fall, being far below the value of 1.81, (SSIF Broker 1,4970).
The turnover of Electromagnetica in 2008 fell more than eight times from the level of 3.9 million
RON (1.1 million euros) to nearly 0.5 million RON (0.1 million euros ); company recorded a loss of
2.3 million RON (0.5 million euros) from a profit of 1.4 million RON (0.4 million euros) in 2008.
Furthermore during 2008, the creditors opened its insolvency procedure.
The average of 10 companies is 2.2818, which is close to the critical value of 1.81. The
standard deviation has a value of 0.721, which is not a good value.

Figure 2 The application of the Altman model to10 companies BSE in 2010-2011

Compared to 2010, the average fell by 16% and standard deviaton increased by 116%. The
effects of financial crisis on the top 10 companies listed on BSE manifest as follows (Chart 2):
- In 2010 all companies had values greater than 1.81; 4 have values higher than 2.99;
- In 2011, one company has a value greater than 3; 4 were near the critical limit of 1,81 and 1
below the same limit.

CONCLUSION

Some of the companies listed on the BSE felt in revenue and expenditure budgets the effects
of financial crisis, while others "well madam" even in this period. The banks and petroleum
companies have been replaced by issuers less visible in the top turnover.
  The external turmoil raised new company-star on the Bucharest Stock Exchange. The
reconfiguration of portfolios pulled to the forefront of the league seconds issuers, as BIOFARM.
The most traded corporate profits have been "rendered" by the crisis, and therefore, their
actions followed a descending trend. The main negative factors for the evolution of companiesr
were difficult adaptability to new conditions of market, very few correctly anticipating the
economic crisis proportions, the sharp decline in demand, increasing financing costs, high volatility
of the RON against the euro, a weak management of currency risk.
The importance of bankruptcy prediction and understanding of the causes of economic
failure is finally a pragmatic matter.
The direct costs of insolvency or bankruptcy (legal fees, accounting honor, the auditors and
lawyers) are low compared to losses that can record shareholders / creditors as a result to decrease
firm value. Also indirect costs such as losses to managers, business partners, financial institutions,
state are considerable. All have been fully felt on the Romanian market in financial crisis. Anything
progress in identifying causes and failure prediction can minimize costs discussed.

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Given the current financial crisis is a real challenge to try building a bankruptcy prediction
function score for Romanian companies, because the bankruptcy process is quite different
coordinated in Romania compared with most developed countries for which there Z Score
methodology.

REFERENCES

1. Aharony, J., Jones, C. & Swary, I. (1980). An Analysis Of Risk And Return Characteristics
Of Corporate Bankruptcy Using Capital Market Data, Journal Of Finance, pp. 1001
2. Altman, E. (1968). Financial Ratios, Discriminant Analysis, and the Prediction of Corporate
Bankruptcy. Journal of Finance, 23 (Sept.), 589-609
3. Altman, E. I. (2002). Revisiting Credit Scoring Models in a Basel 2 Environment, Working
Paper, Stern School of Business, New York University
4. Balcaen, S. Ooghe, H. (2004). 35 Years of studys on Business Failure: An Overview of the
Classic Statistical Methodologies and their Related Problems, Vlerick Leuven Gent Working
Paper Series 2004/15
5. Chava, S. and R. Jarrow. (2005). Bankruptcy Prediction with Industry Effects, Market
versus Accounting Variables, and Reduced Form Credit Risk Models. Working Paper
Cornell University
6. Claessens, Stijn and Leora Klapper (2005) Bankruptcy around the World: Explanations of
its Relative Use, American Law and Economic Review, 7 (spring): 253-83
7. Franks, Julian R. and Gyongyi Loranth (2005) A Study of Inefficient Going Concerns in
Bankruptcy, CEPR Discussion Paper No. 5035.
8. Hillegeist, S., D. Cram, E. Keating, and K. Lundstedt. (2004). Assessing the Probability of
Bankruptcy. Review of Accounting Studies, 9 (1), 5-34
9. Kaiser, Kevin M.J. (1996) European Bankruptcy Laws: Implications for Corporations
Facing Financial Distress, Financial Management, 25, 67–85
10. Ohlson, J. (1980). Financial Ratios and the Probabilistic Prediction of Bankruptcy Journal
of Accounting Research, 18, 109-131
11. Ross S., Westerfield R., B. Jordan (2001) Fundamentals of Corporate Finance, Richard
Irwin INC.
12. Thorburn, Karin S., (2000) Bankruptcy Auctions: Costs, Debt Recovery and Firm Survival,
Journal of Financial Economics, 58, 337–368

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of Economics and Issue 2(18),
Public Administration 2013

PERFORMANCE MANAGEMENT COMPONENT OF CORPORATE


GOVERNANCE IN THE CENTURY OF SPEED
Associate Professor Ph.D. Florin BOGHEAN
Stefan cel Mare University of Suceava, Romania
florinb@seap.usv.ro

Abstract:
The current paper encompasses both a global and a national perspective, taking into account the financial
globalization process which impacts all companies from all over the world. This perspective is based on the effects that
the globalization process has brought about. In this context, it mainly refers to financial globalization, with its positive
and negative aspects. The positive side of globalization is that the financial markets have emerged, the commercial
barriers have faded and, in some cases, have even disappeared, thus leaving room for the companies from almost any
country to operate on this open market. On the other hand, as this standardization is being implemented, companies are
facing some other complicated problems. Some of these problems come from the spread of panic, as is the case of some
companies that face financial problems and, subsequently, panic easily spreads all over the world, affecting even
companies that are not necessarily facing difficulties. This phenomenon creates a mass movement which can lead to a
financial crisis, such as the one we are facing today. Any movement on the financial or on the political scene can easily
shake the whole world. In this situation, the role of financial management is very important. In the future economic
environment, the idea of greater risks associated with greater losses will disappear, as a more efficient financial
management will eventually succeed in reducing such risks.

Key words: financial management, accounting, decisional process

JEL classification: H11

I. INTRODUCTION

Corporate governance translates by people’s art of running and organising a business. As you
can see, I have used the word art. Why? Because apart from technique, science and knowledge –
which are all prerequisites of successfully running a business – it also takes something else: talent,
vision, culture, courage and many other such qualities. Corporate governance has become a hot
topic in the current business environment. The reason seems to be the fact that today’s globalisation
in the business world had led many business owners to become more disconnected from the
actual running of their business units. In many cases, large business owners can no longer get
personally involved in running their activities. The reasons are numerous, but mention must be
made of some of these:
 extending their business beyond the traditional boundaries;
 the accelerated development pace and the increased complexity of their business;
 the amount of technical knowledge needed to ensure efficient and effective governance;
 the inability to simultaneously understand and assimilate the local peculiarities of the
environment where their business is undertaken: culture, regulations, customs, etc.
Problems may occur for two reasons:
 an individual investor may lack the necessary stimuli to bear the costs related to the
management’s accountability to meet their obligations. therefore, the investor may try to
manifest a free-rider behaviour while monitoring and executing the contracts warranted by
other investors;
 the methods used to compel and reprimand managers may be incomplete or
completely lacking, probably due to the requirement to observe property rights in that
particular country. these two problems are usually correlated.
Management and the way it is conducted is not an end in itself, but a vital factor for an
efficient and high yielding organization. Economic performance depends on the efficient

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management techniques applied by professionals. The final stage focuses on knowledge based
management.
The role of financial management is to create a system of managerial relationships that help
make the business more efficient. In the economic theories of the future, the traditional idea
according to which a larger profit entails greater risks will eventually disappear, as more efficient
management techniques will further reduce these risks, influencing the external environment factors
(Boghean, 2010). Both entrepreneurs and managers believe that financial management is highly
important since it focuses on the controllable part of the business, i.e. the one that can help
maximize the profit.
Accounting has become a universal financial language, an instrument that enables the
provision of useful business information that assists in the decision-making process of any business
entity. The acquisition of the financial information entails the close observance of a business entity
and of its specific activities as well as the processing of the data by means of the specific accounting
language and methods, in order to meet the needs of the users. The processing and the employment
of the financial information are specific activities of accounting and are directed at the production,
collection, storing, processing and provision of financial data. In this respect, the operations range
from calculating, analyzing and interpreting, classifying and using the information in the decision
making process. Accounting has also become the language of business or an information system
needed in order to meet the needs of business entities, an instrument used for the internal and
external presentation of an organization, a link between the economic activity and the policy
makers. Any fair and efficient decision is based on the close observance of the following steps:
setting the desired goal, establishing the means and the methods used for reaching it, selecting the
best option, applying it and, subsequently, analyzing the outcome. In this endeavor, the financial
information provided by accounting is vital in order to make the most appropriate decision.
According to the general definition of financial management, it is a process which enables the
planning, organization, monitoring and reporting of the financial resources of a business
organization by completing its mission and by meeting its objectives (Trenca, 2007), as presented in
Figure 1:

Figure 1. The financial management cycle


Source: www.who.int

The above figure leads us to believe that a company needs financial management for:
 the efficient management/allocation of resources;
 the more rapid completion of the mission/objectives of the organization;
 the performance of the necessary analyses to assist in making financial decisions;
 the financial planning, monitoring and evaluation of the activities;
 the detailed presentation of the financial position of the company;
 the sustainable development of the organization by setting objectives.

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II. PERFORMANCE MANAGEMENT ON AN INTERNATIONAL LEVEL

Performance management is essential nowadays, as competition and leadership organizational


methods are taking their toll. Even if it’s part of the Human Resources department, this type of
management is much more complex and more complicated, as it involves activities such as constant
progress, feed-back and coaching for improved performance, as well as implementing employee
training programs and performance related packages.
It is also a systemic process that can help improve the overall performance of the enterprise as
well as that of the individuals that work in teams. Performance management focuses on outstanding
results by communicating expectations, by defining roles and competencies and by setting the
targeted and measurable results.
Performance management is both a strategic and an integrated approach that assists organizations in
achieving the desired results by improving both the performance of teams as well as that of each
individual. The concept of performance management has gained momentum at the beginning of the
‘80s, when higher standards have started to be implemented in quality performance as well.
Performance management is a process that entails the communication between management and
employees throughout one year. The process is constant and cyclic in nature (Armstrong Michael,
2009). A performance management system entails the following actions:
 the drafting of clear and precise job descriptions and of performance plans for employees
that would include key results and performance indicators;
 the recruitment and selection of the right candidates by implementing an adequate
selection process;
 the negotiation of responsibilities and performance indicators for measuring results, as
well as the setting of the performance and productivity standards in compliance with the
current regulations;
 the identification of the training and personal development needs by measuring the
acquired results against the existing standards and the implementation of improvement
and development programs;
 the quarterly discussion and assessment of the achieved results;
 the provision of an adequate compensation system;
 career development support and consultancy for employees;
 conducting interviews with employees who choose to leave the organization in order to
enquire about their reasons to resign;
The concept of performance is critical for the success of a company and is one that cannot be
looked over. However, it is rather strenuous, difficult to implement and is mostly disliked both by
employers and employees. Moreover, the results are hard to measure, whether or not performance
increases after its implementation.
According to the research conducted by World at Work, (Rhodes Marcia, 2010) 58 % of the
surveyed organizations gave their performance management system a grade of C or below (A –
extremely effective, B – average effectiveness, C – little effective, D – not very effective, E -
ineffective). All these statements may be justified by the fact that people have changed, technology
has advanced and, therefore, the interaction between people and technology is no longer the same.
In order to face the current challenges, organizations have to assume a more complex performance
management system.
People’s expectations have changed, generations constantly develop and expectations are
equally increased. Employees have taken on a more active role and they want to be able to monitor
their own performance, with a double feed-back. Managers have changed as well, and they no
longer control and order, but guide and provide a positive feed-back, thus inspiring and encouraging
performance.
However, the most important change is visible in the field of technology, as scientific
progress is quite accelerated. Recent years have revealed a need to simplify automation and

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concentrate information. Performance management will have to keep up with these changes, or risk
failing to reach its main goal, i.e. that of increasing performance.

III. INTERNATIONAL EXCELLENCE MODELS FOR MEASURING


PERFORMANCE

The first international prize for excellence in business, or EFQM (European Foundation for
Quality Management) was created in 1992 at the initiative of 14 European companies (Popa Virgil,
2005). The underlying principles of the model state that the human resource is a prerequisite of high
performance. The purpose of the award is to promote quality in European management in order to
gain a higher competitive advantage and to support quality improvement activities. This European
award is actually meant to increase the quality standards of multinationals in order to gain a
competitive advantage on an increasingly global and competitive market.

Table 1 – Performance indicators per segments and perspectives


Management Investors/Shareholders Creditors
Operational analysis: Investment rate of return: Liquidity
gross margin yield on net assets general liquidity
profit margin return on equity liquidity value
 operating expense analysis return on shares
structural analysis cash flow per share
operating leverage share price increase
comparative analysis total return for shareholders

Resource management Profit distribution: Financial gearing


asset turnover dividend per share gearing
working capital management dividend rate financial stability
stock turnover distribution rate/undistributed financial autonomy
receivables turnover profit
accounts payable turnover dividend cover ratio
efficiency of human resource use - dividends/total assets
Profitability: Market performance Debt service
net economic yield cash-flow multiplication degree interest coverage ratio
gross yield market value/book value debt coverage ratio
net assets yield stock price relative movement fixed costs coverage ratio
economic value added net worth cash-flow analysis
economic profit
cash-flow yield
free cash-flow.
Source: Erich A. Helfert, Techniques of financial analysis, a guide to value creation, McGraw Hill Companies, Inc.,
New York, 2003, p. 113.

The American equivalent of this European award is the Baldrige Award, initiated in 1987 for
companies to be encouraged to adopt TQM (total quality management). This award is accepted
worldwide and serves the same purpose as the EFQM award, i.e. to promote quality excellence and
competition among American companies. This model focuses on results and objective, but the
results rank lower in percentage as compared to the European model, 45 % respectively, as depicted
in figure no.2.

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Personnel Personnel
orientation 9% satisfaction 9%

Business results 10%


Management 10%

Processes 14%
Policy and Customer
strategy 8% satisfaction 20%

Resources 9% Impact on
society 6%

Factors 50% Results 50%

Figure 2: The Baldrige American business model


Source: Virgil Popa, Managementul și măsurarea performanței organizației, 2005, University Press, pp. 25

Many multinational companies believe they have reached the best performance. The
managers of American companies, in particular, believe that their employees are motivated to get
results, that they prefer to initiate various actions and that they put in all their efforts when they are
granted decisional power.
In Asian cultures, however, and China in this particular example, social values dictate against
such an approach. Individual performance is not taken into consideration; initiative at the workplace
is seen as an insult to the manager, while honest feed-back is a taboo subject.
Developing countries thus force multinationals to consider all these cultural differences and to
adapt to the particular circumstances of other countries. Performance is directly related to the
survival of the company and, under the present circumstances, it is a rather difficult target.

IV. DIFFERENCES BETWEEN INTERNATIONAL AND NATIONAL FINANCIAL


MANAGEMENT (1)

Four main differences between national and international financial management have been
identified in time, as follows:
 the introduction of foreign currency;
 political risk;
 market imperfection;
 business opportunities.
The exchange rate is an additional risk for financial management, one that has to be carefully
considered in an international environment. Exchange rate risks consist in the fluctuating prices of
currency or in the exchange rate differences that can turn a profitable business into a rather
inefficient one.
Political risks include any change in the economic environment of a country, in terms of
taxation, contract and legal regulations. A government is expected to change the rules of the game
at any moment and quite unexpectedly.
Market inconsistencies are reflected in the increasing differences between countries in the
present economic circumstances and in an integrated global economy. The differences consist in the
costs of transport, in the various legal provisions, such as VAT. These market inconsistencies force
financial managers to make an additional effort in order to get the best opportunities, as compared
to other countries.

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The implementation of business activities in other countries that the country of origin
increases the chances of gaining additional value. The different sets of opportunities bring
additional benefits to investors, while risks are also equally brought along.
Just as in the case of national financial management, the purpose of international financial
management is to enhance the wealth of the shareholders. This is not only the shareholder’s
purpose, but also the main interest of all the stakeholders, such as employees, suppliers, clients, etc.
No goal can be reached without enhancing the return of the stakeholders or increasing the stock
price.
There are also international initiatives, such as GATT (General Agreement on Trade and
Tariffs), NAFTA (North American Free Trade Agreement), and WTO (World Trade Organization)
that have promoted and have liberalized international trade. The existence of multinationals today is
due to these international agreements that have negotiated the terms of international trade. Thus, the
premises of international standards have been created, and the best business opportunities have
equally been provided.
Financial management has become an integral part of all multinational companies –
Multinational Companies (MNC). The lack of expertise in the field of international financial
management can endanger market survival, since international financial markets have an entirely
different form and different dynamics from domestic financial markets. A coherent policy of
international financial markets can help an organization reach the same efficiency and effectiveness
on all economic markets.

Graph no. 1: Performance management instruments


*Source: www.indicatorideperformanta.ro

The most used key performance indicators in Romania are related to sales, with a strong
financial weight, examples including sales per client, average invoice value, average value per type
of product or service, number of visits to clients in a certain time interval and number of active
customers.
The results of the research conducted in the field in Romania during the past few years (
Performance Management in Romania 2011; Balanced Scorecard in Romania 2010) and the rising
interest in enrolling in professional training courses, conferences and Balanced Scorecard system
implementation, prove that some companies have started to adopt a consistent approach in
measuring performance.

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VI. CONCLUSIONS

The financial performance of a business entity reflects its potential and financial stability and
is established after analyzing a set of both quantitative and qualitative factors.
The objectives of the financial-accounting information for both internal and external use
consist of providing accurate data that help the users understand the situation or know the economic
facts in terms of an objective assessment that enables them to make decisions, as follows:
 Provision of information needed to make business decisions;
 Provision of information needed to measure the economic activity of the business unit;
 Provision of information needed to evaluate the real and the potential cash flows;
 Provision of information related to measuring and comparing the performance of the business
unit;
 Provision of information about the efficient management of the resources of the organization;
 Provision of information on the business activities that can be described and measured.
Any business organization, whether large or smaller, is a system of financial relationships and
cash flows that are activated and directed by management decisions.
The nature of the managers’ information needs differs from one organization to another,
depending on the type of activity. The type of reports required by managers also depends on the
objectives they wish to reach; they are related to the completion of the management functions:
 protecting the assets of the organization;
 developing business plans;
 monitoring the activities of the organization, making decisions.
Financial management is as important as any production or marketing process. The lack of
efficient financial management can easily cause the financial collapse of an organization,
subsequently leading to insolvency and then bankruptcy. A company must always be aware of its
costs and revenues, while each financial decision must be based on an analysis of both financial and
non-financial indicators.
Using the financial information in the management process is a prerequisite of modern times.
The increasingly complex issues organizations have to face put managers in situations they
sometimes find rather hard to overcome. The indispensable means for solving these issues consist in
the information that must meet the various knowledge needs of decision makers in all hierarchical
levels of an organization. Information fuels decisions. It does not replace decisions but merely
supports them, providing decision makers with data that they would subsequently use in making the
right decisions.

ENDNOTES
(1) www.efinancemanagement.com, accessed on 14.04.2013

VII. REFERENCES

1. Armstrong Michael (2010), Managementul Resurselor Umane, 2009, 10th edition, Codecs.
2. Florin Boghean, Contabilitatea in procesul de asistare a deciziilor, Casa Cartii de Stiinta, Cluj
Napoca.
2. Erich A. Helfert (2003), Techniques of financial analysis, a guide to value creation, McGRaw
Hill Companies, Inc., New York.
3. Rhodes Marcia (2010), Study on the State of Performance Management,
http://www.worldatwork.org, a report by WorldatWork and Sibson Consulting, October.
4. Popa Virgil (2005), Managementul și măsurarea performanței organizației, University Press.
5. Trenca I. Ioan (2007), Fundamente ale managementului financiar, Casa Cărții de Știință, Cluj-
Napoca.
7. www.efinancemanagement.com

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Public Administration 2013

PROFESSIONAL COMPETITIVE EVOLUTION AND


QUANTIFICATION MODELS IN ACCOUNTING SERVICE
ELABORATION
Associate professor Ph.D. Gheorghe FATACEAN
Babes Bolyai University Cluj‐Napoca, Romania
gheorghe.fatacean@econ.ubbcluj.ro

Abstract:
The objective of this article consists in using an assessment framework of the accounting service elaboration.
The purpose of this model is the identification and revaluation of an elite group of expert accounts from Romania,
which should provide solutions to solve the most complex legal matters in the legal field, in the field of criminal, tax,
civil, or commercial clauses making the object of law suits.

Key words: professional competence, assessment, quantification model, accounting service, expert accountant

JEL classification: H11

1. RESEARCH METHODOLOGY

The scientific research methodology used in this article is based on the observance of the
indestructible relation between quantitative and qualitative, combining qualitative and quantitative
research, in order to increase the results obtained following the research. The qualitative approaches
consider the interferences of the accounting service elaboration with various fields of the human
society, contributing to the presentation of the part played by the accounting service elaboration in
the settlement of ardent issues in the economic and social fields.
The quantitative point of view, the methodological process of research has been raised by
revising the specialized literature in the field. Among the research methods used during the
investigation, the observation method and the descriptive narrative method are highlighted. The
descriptive method was applied on the main fields where judicial or extrajudicial accounting service
is requested, and on the tax objectives within the judicial accounting expertise carried out by the
court.
The objective of the descriptive/narrative method is to emphasize the main activities that
quantify quantitatively and qualitatively the professional competence of the experts. The scientific
field, given the strong practical character of the accounting expertise activity, is mostly based on
inductive approaches, departing from practice to theory. The work instrument used consists in the
analysis of bibliographic sources, but also of numerous works of judicial or extrajudicial accounting
expertise. The issue of setting a professional competence assessment model in accounting expertise
is supported and argued, departing from these aspects:
 defining elements of the accounting expertise activity;
 the dimension of the accounting activity and implicitly of the accounting expertise activity,
as social practice;
 the part played by the accounting expertise in providing social order;
 the size of the accounting profession from the point of view of certain remarkable specialists
in the field.

II. DEFINING ELEMENTS OF THE ACCOUNTING EXPERTISE ACTIVITY

The defining elements of the accounting activity are presented on two columns, respectively:
definition of accounting expertise, and, respectively, the principles and values on which the
accounting expertise activity is based.

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The generic definition of expertise comes from the Latin language, from the word “expertus”,
which is translated as “skilled”, therefore expertise, by definition, means competence, knowledge
and abilities.
According to other members, the accounting expertise is a form of scientific research carried
out in order to clarify the manner in which certain facts, circumstances, economic-financial
situations are reflected in documents and in the technical-operative and accounting evidence.
(Boulescu, M. Ghiţă M., 1996).
The accounting expertise, as dimension of the accounting profession, claims the observance of
certain principles and values that give it relevance and credibility among users. Among these
principles, the professional competence, joined by prudence, represents the gravity center of the
profession. The professional competence and prudence, as requirements of the Ethical Code of the
Accounting Professionals, claim that the professional accountant should keep his/her professional
knowledge and skills at the required level to make sure that a client or employer takes over
competent professional services based on the latest progresses in practice, legislation and
techniques, and acts in accordance with the technical and professional standards in force.
Together with this principle, the Optional Ethical Code, inspired from the IFAC code, claims
the observance of other principles, respectively: integrity, objectivity, confidentiality and
professional behavior (professionalism).
The dimension of the accounting activity and implicitly of the accounting expertise
activity, as social practice
The purpose of accounting diversified and evolved together with the society, and the
accounting acquired three important functions (Capron M. 1993), namely:
 it creates a climate of trust among the participants in the economic life;
 it constitutes an auxiliary of the decision-making power at the microeconomic level;
 it plays the part of mediator in the social process, among the protagonists of the economic
and social life that are found in the producers of accounting information and the users of
accounting information.
In this sense, both the accounting in general, and the activity of accounting expertise, in
particular, represents a stake for the economic and social actors, and the expert accountant becomes
an activity bearer, manifesting himself when the monopoly of carrying out the profession has been
fractured, an authority built on competence and knowledge.

III. THE PART PLAYED BY THE ACCOUNTING EXPERTISE IN PROVIDING


SOCIAL ORDER

The capacity of expert accountant reflects the highest degree of competence that the
professional accountant may manifest and exercise. Departing from these assertions, some
prestigious authors of the accounting literature of our country define the part played by the expert
accountant also in optimizing the structural organization of the accounting activity (Horomnea, E
2008).
The expert accountants play a specific role in the accounting production, considering that the
accounting user circle has widened way beyond those who are permanently endowed with the
induction of the enterprise (Capron Mecheel 1994, pag. 116-117).
The current configuration of the ratio between society-State and economy identifies a series of
users of the information that are found in the judicial accounting expertise reports, respectively:
 the State, which is interested in the level of taxes and fees making the object of additional
decisions of taxation, and also making the object of litigations of tax disputes, where the
expert accountant is appointed to set the additional taxation made by the correctly performed
tax inspection;
 the social bodies managing the issue of setting the premiums calculated for the former
employees based on the retirement decisions, documents which many times make the object

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of disputes that later become tax litigations or work conflict litigations, whose object is to
establish the average pension score;
 the courts of law who take into consideration the settlement of criminal causes concerning
the setting of the prejudice caused to the State budget or to the social security budget,
acknowledged by the tax control bodies, and which enter the scope of production;
 the courts of law specialized in the field of commercial law, who must clarify the level of
the commercial debts under litigation;
 the National or County Commissary for the Protection of Consumers who introduced actions
before the court concerning abusive contract clauses of loan agreements, and who wish to
know their impact on the consumers;
 the banking companies that ask the expert accountants to establish the level of the
outstanding debts or of the debts that are under foreclosure.
Departing from these provisions, we believe it is of great topicality to have the appraisal of
arbitrators as regards the dimension of the accounting profession, of the expert accountant, in
modern society where the “accountant profession”, from its beginnings until present days, has
remained one of the noblest, but also one of the hardest and most responsible professions.
Accounting has become the current profession of modern times. By extending the services brought
to the national economy, it is technically unlimited and indispensable both for the enterprise, and
for the collectivity (Stefan I. Dumitrescu, Dumitru Toma, 1973, p.146).
Departing from these challenges of the expert accountant activity, the issue of assessing the
accounting expertise and implicitly the expert accountants, through a system of quantitative and
qualitative indicator, is imperative.
The purpose or goal of this assessment is to classify experts, according to their social
recognition, to the level of professional competence manifested in order to train them, in the most
complex and difficult judicial accounting expertise, claiming a high level of knowledge.
This assessment activity must be based on two categories of indicators, respectively:
 one system of quantitative indicators;
 one system of qualitative indicators.
The use of these indicators represents the mirror of the activity carried out by the expert
accountants, and have the purpose to emphasize the biggest professionals in the field of judicial and
extrajudicial accounting expertise.
In the system of quantitative indicators by means of which the activity of a proposed expert
may be identified, we notice:
 the number of judicial accounting expertise ordered to be performed during one year by the
expert accountant;
 the number of judicial accounting expertise carried out by an expert accountant during one
year;
 the ratio between the number of judicial accounting expertise ordered to be performed and
the number of accounting expertise actually performed, the unit value of the indicators
having relevance in the profession in the conditions of approximately 10-12 accounting
expertise carried out;
 the number of fields in which an expert accounts carries out accounting expertise, their
maximum value being included in the chart of options, and the performance of accounting
expertise in all the fields is not a certain level of professional competence;
 the number of judicial or extrajudicial accounting expertise carried out by an expert
throughout his/her entire activity, a number of 50-70 accounting expertise suggesting the
image of an experienced, competent expert accountant.
Together with the quantitative assessment indicators, an important part is played by the
system of qualitative indicators, such as:
 the ratio between the number of accounting expertise for which the quality audit visa has
been granted, and the number of accounting expertise carried out, its unit value is an
attestation of professional competence;
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 the ratio between the number of accounting expertise whose opinions have been accepted by
the courts of law as evidence before the justice, and the number of accounting expertise
carried out;
 the level of the hourly rate set and accepted by the court, a level as high as possible of the
professional competence of the expert;
 the configuration of the professional reasoning joining the decisions of the expert
accountant, and which is accompanied by as many arguments as possible.
 The professional reasoning, designed as an instrument of the expert accountant, is based on
the following activities and habits:
 knowledge and application of the principles of national category and the concept and criteria
of recognition;
 knowledge and application of the fundamental principles and of the normative principles of
accounting;
 obtain knowledge in the field of law and tax legislation.
We may actually assert that the professional reasoning is the main factor making the
difference between experts, as regards their good image among the users of accounting expertise.
One final indicator which, although it is numeric, is considered to be qualitative, is the number
of expertise carried out as expert assistant on the parties’ recommendation, an activity which
represents an interface of the recognition of the competence and professionalism of an expert
accountant.
Following the numerous judicial accounting expertise carried out following the appointment
as expert designated by the court, the expert accountant becomes known in the professional,
business environment and in the society and, as such, his/her services are requested by an increasing
number of applicants, appointing him/her as expert party designated by the parties under litigation.
During the judicial accounting suits ordered by the court, the bodies ordering the performance
of accounting expertise take into account the qualification of the expert accountant. The more sound
knowledge they have, the more trust they inspire to the legal bodies (Henegaru Liviu, pag. 241,
1976 – Control financiar şi expertizǎ contabilǎ – Ed. Didacticǎ şi Pedagogicǎ Bucureşti, 1976).

IV. CONCLUSIONS

Departing from the aspects presented in the contents of the article, we consider that, in the
accounting expertise activity, the following intercessory is required:
 institute a competence assessment model based on the quantitative and qualitative
indicators enumerated and developed in the contents of the scientific field;
 strict evidence of the judicial and extrajudicial accounting expertise works, kept by
the expert accountants, an intercessory made both at the level of the subsidiaries of the body,
and at the level of courts of law: first instance courts, tribunals, respectively the Court of
Appeal;
 classification of the expert accountants per fields and at the level of activity carried
out, allowing the court to provide such strategies, in the most complex and difficult causes,
through the most competent expert accountants;
 assert and recognize the profession of expert accountant in the frame of liberal
professions in the society and in the business environment.

V. REFERENCES:

1. Boulescu Mircea, Ghiţǎ Marcel, (1996). Control financiar şi expertizǎ contabilǎ, Editura
Eficient, Bucureşti, (Financial Control and Accounting Expertise)
2. Crǎciun Stefan, (2002), Controlul şi auditul financiar, Expertiza contabilǎ, Editura
Economicǎ. (Financial Control and Audit, Accounting Expertise)
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3. Briciu Simion, Todea Nicolae, Socol Adela, Teiuşan Ciprian, Luka Vasile, Sicoe Alina,
Dobra Ioan, (2003), Controlul şi expertiza, Ed. Risoprint. (Control and Expertise)
4. Henegaru Liviu, (1970), Control financiar şi expertizǎ contabilǎ, Editura Didacticǎ şi
Pedagogicǎ Bucureşti. (Financial Control and Accounting Expertise)
5. Capron Mecheel, (1994) Contabilitatea în perspectivǎ, Editura Humanitas Bucureşti, ,
(Perspective Accounting)
6. Standardul Profesional 35, Editura CECCAR (2011), Ediţia a IV revizuitǎ (Professional
Standard, CECCAR, Publishig House, Edition IV revised)
7. Dumitrescu I Stefan, Toma Dumitru, (1973), Principiile contabilitǎţii, Editura Didacticǎ şi
Pedagogicǎ Bucureşti. (Principles of Accounting)

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of Economics and Issue 2(18),
Public Administration 2013

THE STRUCTURAL DEFICIT – A NEW MEASURE FOR FISCAL


DISCIPLINE IN THE EURO AREA
Ph.D. Student Cristina PUIU
Doctoral School of Economics and Business Administration, “Alexandru Ioan Cuza” University of Iaşi, Romania
puiu.cristina@yahoo.com

Abstract:
The aim of this paper is to assess the importance of the new limit for the government deficit in order to
improve fiscal discipline in the Economic and Monetary Union in Europe. Since the introduction of the single currency
there have been debates regarding the lack of fiscal integration. The monetary integration process triggered the
centralization of monetary policies while the fiscal policies remained at national level. Although the member states of
the euro area were subject to restrictions imposed by the Stability and Growth Pact in order to provide an assurance
against asymmetric shocks, the recent financial crisis revealed high levels of public deficits. Thus, the measures were
not enough to establish an environment of fiscal discipline in the currency area and the currency area proved to be
suboptimal. Therefore, new limits were imposed through the Treaty of Stability, Coordination and Governance in the
Economic and Monetary Union. This study will provide a clear understanding of the concept of structural deficit,
measures used to quantify it and the shortcomings of this indicator. Furthermore, it will show that, despite the limits of
the indicator, it represents an improvement in achieving stability in the euro area.

Key words: structural deficit, one-off measures, convergence, fiscal indiscipline, optimality

JEL classification: H62, H86, F36

INTRODUCTION

The optimum currency area theory states that, in order to benefit from joining a currency
area, the member states have to fulfill certain criteria. One of these criteria, qualified as a political
criterion, refers to fiscal integration. According to Mongelli, fiscal integration has three dimensions:
the degree of fiscal convergence, the capacity to act as a shock absorber through fiscal stabilizers
and the public risk sharing facility (Mongelli, 2002). While the dimension referring to fiscal
transfers was never satisfied in the euro area, the other two criteria should have been fulfilled as a
result of the existence of the Stability and Growth Pact. The recent financial crisis clearly
demonstrated the fact that provisions of the previously mentioned pact were not enough to assure
fiscal convergence and financial stability.
The existence of high levels of debt and deficits in several member states of the Economic
and Monetary Union in Europe, like Portugal, Ireland, Greece and Spain, is seen as a threat to the
survival and the stability of the single currency. Therefore, the euro area is not an optimum currency
area and this situation recalls for new measures that can re-establish the trust in the fiscal discipline
in Europe.
The lack of fiscal integration clearly suggested the necessity of promoting more
precautions economic policies in times of economic expansion, acting for preventing the
accumulation of imbalances. This behavior provides the incentives for creating safety measures that
will allow an adequate reaction to significant negative shocks.
On 1 January 2013, the European leaders agreed that The Treaty of Stability, Coordination
and Governance in the Economic and Monetary Union should enter into force. Also named the new
budgetary pact, fiscal compact or the agreement upon budgetary stability, the treaty was signed at 2
March 2012, at the Reunion of the European Council, by 25 member countries, except the United
Kingdom and Czech Republic. The new elements brought by the treaty mainly refer to targeting the
structural deficit and anchoring the commitment to fiscal discipline in the national legislation.

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The articles 3 and 4 of the treaty establish rules for the fiscal policy in the Economic and
Monetary Union. In order to ensure sound public finances, the member states must fulfill the
following requirements (TSCG, 2012):

- country-specific medium-term budgetary conditions;


- a limit of 0,5% of GDP at market prices for the structural deficit;
- surpassing the 60% limit of GDP for the public debt triggers a reduction of the debt by
0.5 every year.
The aforementioned rules allow exceptional measures. The latter refer to an unusual event
that cannot be controlled by the contracting party and which has a major influence upon the
financial position of the public administration or times of major economic recession, with the
condition that the temporary deviation of the contracting part does not alter the fiscal sustainability
on medium term.
A state’s decision regarding whether or not to ratify the Treaty on Stability, Coordination
and Governance should take into consideration that fact that it represents a necessary condition in
order to benefit from financial assistance in the framework of the new programs under the European
Stability Mechanism.

DATA AND METHODOLOGY

One of the most debated measures introduced by the fiscal compact refers to the new limit
for the structural deficit. Although the limit is clear, there are several problems regarding the
conceptual framework of the indicator, the methodologies used in order to estimate it and the
differences in estimations made by some international institutions.
The problems related to quantifying the structural budget deficit are not new. A study
conducted by the Deutche Bundesbank in 1997 provides a detailed assessment of the problems
associated with calculating structural budget deficits. Recently, establishing a limit regarding the
structural component of the government budget balance for the European countries led to a strong
interest in assessing the empirical issues related to this restriction. The studies of Sawyer (2011),
McArdle (2012), Reiss (2013) offer a critical assessment of the measure referring to the structural
budget balance. Therefore, we consider that it is very important to provide a clear understanding of
the structural deficit and its practical shortcomings.
First, we will define the concept and the elements used for its estimation.
The rest of the paper will focus on estimation techniques and various critics brought to
them. In order to highlight the differences between the estimations of the structural deficit, we use
the most recent data provided by the European Commission and the International Monetary Fund in
various reports such as the European Economy and the World Economic Outlook.

STRUCTURAL BUDGET DEFICIT: CONCEPTUAL FRAMEWORK

The introduction of the restrictions regarding the structural deficit in the new fiscal treaty
has triggered a number of debates regarding its definition and the methods used to quantifying it.
Furthermore, it is important to state that the notion of structural deficit is not new, the interest for
this concept dating back to the 1930.
The structural deficit represents a fundamental indicator for nominal convergence, through
reflecting how the public finances are administrated. Taking into consideration that some of the
euro area member states have exceeded the 3% of GDP limit for the government’s deficit, as a
result of inappropriate public finances management, it has been decided to monitor a new indicator
– the structural deficit.
A low level of government deficit or even a government surplus can hide the existence of
high imbalances. This is the case when the budget balance is the result of a favorable conjuncture -
high public revenues accumulated during economic expansion.

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Therefore, the consolidated government deficit does not represent an appropriate indicator
for evaluating the fiscal policy. It reflects both the influence of permanent factors and transitory
ones, without allowing us to distinguish among them. In order to determine if the deficit or the
surplus is temporary and cyclical or permanent and structural, the economists have developed the
concepts of structural budget deficit and surplus and cyclical budget deficit and surplus.
The structural deficit represents the permanent component of the budget deficit. The
permanent factors that influence the government deficit refer to stable elements of the public
expenditures and revenues. Stable flows of expenditures and revenues are those that prevail under
normal conditions, in the absence of external shocks, when the economy operates at its potential
level, compatible with a low and stable inflation.
The notion of structural budget position is problematic in that it requires assumptions to be
made on the level of potential output and its future path, and on the underlying structural savings
and investment functions, which at best can only be assessed for the past but not for the future.
(Sawyer, 2011).
The structural deficit can also be considered as the discretionary deficit of the public sector
since it represents the result of the decisions taken by the government. Thus, the structural deficit
reflects the fiscal position of the government. It indicates if the government’s intention is to use the
budget for extending the economic activity or to restrain the economic activity.
Therefore, the structural balance is used as an indicator of discretionary changes in fiscal
policy - those evolutions due to adopted fiscal policies and not to the economic environment. The
structural balance can be used to answer the following question: “how much of the changes in fiscal
policies can be explained by the economic conditions and how much by the fiscal policies
decisions?” (Isărescu, 2010).
Furthermore, the structural balance has the following practical application:
- serves at evaluating fiscal sustainability;
- allows the evaluation of the impact of fiscal policy on aggregate demand – quantifying
the fiscal impulse;
- represents a normative indicator.
Cyclical budget deficit represents the temporary component of the budget deficit,
influenced by the economic cycle. Also, this indicator represents the result of the difference
between the actual production and the potential one. Fiscal revenues tend to decrease in recession
and to increase during expansion. Contrarily, on the expenditures side, the increase appears in
recession and the decrease during expansion. For example, the social transfers, especially the
expenditures with unemployment benefits, tend to increase in times of recession and to decrease in
periods of sustained economic growth. A cyclical surplus or deficit disappears when the economy
moves back to full employment. The elimination of the structural deficit or surplus requires the
government’s action.
Estimating the structural deficit allows separating the permanent influences and the
temporary ones from the government deficit and the evaluation of medium term orientation of the
fiscal policy. Although there are numerous methodologies of determining the structural balance, all
imply in essence the quantification of the excess/deficit in demand and the sensitivity of budget
revenue and expenditures according to that. The structural balance is obtained after eliminating this
component from the budget balance.
Another problem related to the concept of structural deficit is the simultaneously use of the
term adjusted cyclical deficit. We consider that this approach is incorrect since the structural deficit
requires the elimination of the cyclical component and also of the one-off and temporary measures.
Therefore, the structural annual balance of public administration is the adjusted annual balance
except the extraordinary measures and the temporary ones (Mourre et al., 2012).
Estimating the structural budget deficit requires the following stages:
- identifying and eliminating the one-off and temporary measures. Significant and non-
recurrent measures can distort the analysis of fiscal position and must be excluded from the
structural balance estimations;

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- assessing the impact of the economic cycle on revenues and expenditures. The estimation
of the cyclical component can be achieved through the aggregate method or through the
disaggregate one.
- estimating the effects of other economic factors, like those related to raw materials.
(Bornhorts et al., 2011)
The necessary elements for estimating structural deficit through the previously mentioned
method are presented in table no 1. These values are determined by the European Commission and
help determine the structural balance as GDP share for euro area countries during 2008-2013.

Table no. 1. The general government budget balance for euro area countries (% of GDP)

2008 2009 2010 2011 2012 2013


Total revenues (1) 45.0 44.8 44.7 45.3 46.2 46.1
Total expenditure (2) 47.1 51.2 51.0 49.4 49.4 49.0
Actual balance (3) = (1) – (2) -2.1 -6.4 -6.2 -4.1 -3.2 -2.9
Interest (4) 3.0 2.9 2.8 3.1 3.2 3.2
Primary balance (5) = (3) + (4) 0.9 -3.5 -3.4 -1.1 0.0 0.3
One-off measures (6) -0.1 0.0 -0.7 0.1 0.1 0.0
Cyclically adjusted balance (7) -2.9 -4.6 -5.1 -3.3 -2.0 -1.8
Structural budget balance = (7) – (6) -2.8 -4.6 -4.4 -3.4 -2.1 -1.9
Changes in actual balance: -1.4 -4.3 0.2 2.1 0.9 0.3
- cycle -0.6 -2.4 -0.1 1.1 -0.4 0.1
- interest 0.1 -0.2 -0.1 0.2 0.2 0.0
- one-off measures -0.1 0.0 -0.6 0.8 0.0 -0.1
- structural budget balance -0.8 -1.8 0.2 1.0 1.3 0.2
Source: European Commission (2012), Report on public finances in EMU, (http://ec.europa.eu/economy_finance/
publications/european_economy/2012/pdf/ee-2012-4.pdf), p. 17
 
During 2008-2013, the structural deficit for the euro area was higher than the limit of 0.5%
of GDP (table no. 1). This evolution can be explained by the major differences that appear in the
situations of public finances for the member states. Countries like Ireland, Greece and Spain faced
large levels of government deficit as a percentage of GPD.
In 2011, the European Commission’s estimations of the structural deficits as a percent of
GDP for every member state of the Economic and Monetary Union in Europe indicate very
heterogeneous results between them (figure no. 1). The comparison indicates that only three of the
member states fulfill the rule of 0.5% of GDP for the structural deficit.

 
Figure no. 1. European Commission’s estimations of the structural deficit for the euro
area countries in 2011
Source: European Commission (2012), European Economy, (http://ec.europa.eu/economyfinance/publications/
european_economy/2012/index_en.htm)

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Taking into consideration the fact that the structural deficit is determined by eliminating
the cyclical components and the influences of the temporary and the one-off measures from the
consolidated budget balance, we consider appropriate to provide a clear definition of those
elements.
Automatic stabilizers
The income tax, value added tax, excise depend on the economic cycle of the economy.
Also, some expenditure like employment benefits, compensations and other public benefits are
influenced by the economic cycle.
The aforementioned revenues and expenditures contribute to smoothen the economic
cycle. If the economy is in the recession phase, the reducing of public revenue will contribute to
reducing the aggregate demand in the economy. During expansion, the revenues from the corporate
income tax are rising; the income tax raises the aggregate demand.
The structural deficit is the position where the previously factors register a normal level.
Automatic stabilizers increase the deficit in recession and reduce it in times of economic boom.
One-off and temporary measure
These measures are not related to changes in the economic environment, being the result of
discretionary decisions of the fiscal authorities. One-off measures and temporary ones have a
transitory effect that does not lead to a sustained change in the budgetary position.
In practice, despite a definition commonly agreed, there is not a common agreement upon
identifying the one-off and temporary measures (The European Commission, 2006, p.114). This
view is also shared by Bornhost et al. (2011, p. 30) that state in their guideline for calculating
structural fiscal balances that, “While it seems straightforward, there are no universally accepted
criteria for identifying one-off or temporary fiscal measures”.
Excepting the obvious cases, like UMTS licenses, each measure has to be assessed
individually, fact that has created debates. Some of the best known examples are: tax amnesties,
sales of non-financial assets, exceptional revenues linked to the transfer of pensions obligations
(European Commission, 2009).

ANALISYS OF THE METHODOLOGIES USED FOR ESTIMATING THE


STRUCTURAL DEFICIT AND THEIR SHORTCOMINGS

The literature in the field recommends two approaches for quantifying the structural
deficit, namely:
- estimating the cyclically-adjusted measures of expenditures and revenues directly through
a regression equation.
- estimating the structural deficit through a method that requires two stages: first the
cyclical component of the government deficit is determined and then it is subtracted from the total
deficit in order to calculate the structural component. This approach is used by the European
Commission, the International Monetary Fund, the European Central Bank and the OECD. This
requires a measure of the cyclical position of the economy and its connection with the budget
components (elasticity).
According to the aforementioned methodology, the structural components of the budget are
obtained by extracting the cyclical component from the current budget, using the following formula
(European Commission, 2009):

Where,
– the structural components of the budget (cyclically adjusted component)
– government deficit;
– cyclical components of the budget on revenues and expenditure categories

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The cyclical component of each category of revenues and expenditure is by using the
output gap and the estimated elasticity to DGP. The formula for estimating the cyclical component
is:
 
This method of estimating the government deficit should be used by all member states of
the European Union in order to obtain comparable results.
Measuring government’s performance, as it is indicated by the structural deficit, depends
crucially on the trust in estimating the cyclical deficit. Taking into consideration the numerous
problems in measuring the cyclical deficit, the structural deficit should not represent a reliable
measure of government’s fiscal position or of the fiscal performance in general. (Snowdon and
Vane, 2002) Thus, despite a clear definition that allows the delimitation of the government balance
in structural and cyclical components, the methods of estimating the structural deficit are not easy.
The most important difficulties are related to identifying the right measure for the cyclical
measures, the temporary and the one-off measures and to estimate the output gap. Measuring the
structural deficit is a contested field, both conceptually and empirically. The errors from estimating
the structural deficit are high.
The problems related to quantifying the structural budget deficits were also emphasized in
previous studies that showed how the methodological and statistical difficulties entailed in
calculating structural deficits have far led to very diverse results and interpretations. (Deutche
Bundesbank, 1997)
Although they use similar methodologies, the estimations made by the departments of
statistics of the International Monetary Fund and of the European Commission are not always the
same. In 2007, there was a gap of 0.5% between the estimations of both agencies for the structural
deficit in the euro area (figure no. 2).

Figure no. 2 The structural deficit in the euro area – estimations of the IMF and of
the European Commission
Source: European Economy, http://ec.europa.eu/economy_finance/publications/european_economy/index_ en.htm and
World Economic Outlook Report, external/ns/cs.aspx?id=29

More significant differences are registered when we observe the estimations for one single
country (figure no. 3). In 2003, the difference between the estimations of the structural deficit is
close to 2% of GDP.

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Figure no. 3 The structural deficit in Italy – IMF and European Commission estimations
Source: European Economy, http://ec.europa.eu/economy_finance/publications/european_economy/index_ en.htm and
World Economic Outlook Report, external/ns/cs.aspx?id=29

Another problem related to estimating the structural deficit, besides the differences
between the estimations of the various agencies, is that, sometimes, the same institution can re-
examine the indicator and provide new values for it (MacArdle, 2012). The International Monetary
Fund published revisions of the level of the structural deficit (figure no. 4); between the first and the
last estimation being significant differences. The highest level was registered in 2009 – a difference
of 3.8 percentage points between the first and the last estimate of the structural deficit for the euro
area.

Figure no. 4 Differences between the estimations of IMF regarding the structural deficit in
euro area countries
Source: International Monetary Fund (2012), Coping with High Debt and Sluggish Growth, World Economic Outlook
Report, [Online] available at http://www.imf.org/external/pubs/ft/weo/2012/02/pdf/text.pdf.

The limit of 0.5% of GDP for the structural deficit, as stated in the Treaty on Stability,
Coordination and Governance in the Economic and Monetary Union, requires a higher precision
that can be achieved in practice. In many cases, the retrospective approach of estimations for a
certain moment determines changes with significant values or there are differences between the
estimations of several agencies. Although in theory the analysis of the structural deficit seems to
offer a better image of the fiscal discipline, the practical problems make difficult the use of this
indicator. Also, may seem inappropriate to fine some states based on an indicator that cannot be
determined with precision.

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CONCLUSIONS AND FUTURE RESEARCH DIRECTIONS

The effects of the current financial crisis revealed important shortcomings regarding the
functionality of the euro area, indicating the fact that it does not represent an optimal currency area.
Some member states faced high levels of government deficits that required substantial interventions
from the European authorities and the International Monetary Fund.
In order to restore confidence in the fiscal discipline of the member countries of the
Economic and Monetary Union, the European policymakers had to provide new solutions. The
Treaty of Stability Coordination and Governance represents an improvement by providing thigh
limits for fiscal indicators.
In this study we have focused on the concept of structural deficit and its implications and
we have identified significant problems related to the conceptual framework and the
implementation of the methodologies used to quantify it. The results show that the measurement of
the structural deficit is inevitable imprecise taking into account the shortcomings regarding the
definition of one-off and temporary measures and the difficulty in estimating the cyclical
component of the fiscal balance.
By highlighting the issues associated with calculating the structural deficit we tried to
emphasize the importance of taking them into consideration in evaluating the values for each
country, especially when the non-compliance with the requirements leads to the obligation to pay a
fine.
Taking into consideration the concern to ensure fiscal discipline in the European and
Monetary Union we consider that there is a need for further improvements in estimating the
structural deficit. Moreover, a special attention should be given to the theoretical foundation of the
limit of 0.5 of GDP for this indicator.

ACKNOWLEDGEMENTS

This work was supported by the European Social Fund in Romania, under the
responsibility of the Managing Authority for the Sectorial Operational Program for Human
Resources Development 2007- 2013 [grant POSDRU/CPP 107/DMI 1.5/S/78342].

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Sandro, Spolander Mikko (2006), A Disaggregated Framework for the Analysis of Structural
Developments in Public Finances, European Central Bank, [Online] available at
http://www.ecb.europa.eu/pub/pdf/ scpwps/ecbwp579.pdf
12. McArdle Pat (2012), The “Fiscal Compact” and the Fiscal Policy, Working Paper,
Institute for International and European Affairs.
13. Mongelli Francesco Paolo (2002), New Views on the Optimum Currency Area Theory:
What is EMU Telling Us?, Working Paper No.138, European Central Bank, Frankfurt am Main.
14. Moure Gilles, Isbasoiu George Marian, Patemoster Dario, Salto Matteo (2013), The
Cyclically-Adjusted Balance Used in the EU Fiscal Framework: an Update, Economic Paper 478,
European Economy, European Comission, [Online] available at
http://ec.europa.eu/economy_finance/ publications/economic_paper/2013/pdf/ecp478_en.pdf
15. Parkin Michael, Powel Melanie, Matthews Kent (2008), Economics, Pearson
Education Limited Press, Harlow.
16. Reiss Lukas (2013), Structural Budget Balances: Calculation, Problems and Benefits,
Oesterreichische Nationalbank [Online] available at http://www.oenb.at/de/img/mop_2013 q1analy
ses2_tcm14-254583.pdf
17. Sawyer Malcom (2011), The Contradictions of Balanced Structural Governments
Budgets, [Online] available at http://www.feps-europe.eu/uploads/nlec/the-impossibility-of-
balanced-structural-govern ment-budgets.pdf.
18. Snowdon Brian, Horward Vane (2002), An Encyclopedia of Macroeconomics, Edward
Elgar Publishing Limited, Northampton.
19. Weymes Laura, Bermingham Colin (2012), Fiscal Compact – Implications for Ireland,
Economic Letter Series, Central Bank of Ireland.
20. ***, Programul de convergență 2011-2014,
http://ec.europa.eu/europe2020/pdf/nrp/cp_romania _ro.pdf , p.38.
21. ***, Treaty on Stability, Coordination and Governance in the Economic and Monetary
Union (TSCG), http://european-council.europa.eu/media/639235/st00tscg26_en12.pdf.
22. ***, The Treaty on Stability, Coordination and Governance in the Economic and
Monetary Union,
http://www.oireachtas.ie/parliament/media/housesoftheoireachtas/libraryresearch/others/dailbriefl
Fiscaltreaty270412.pdf

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of Economics and Issue 2(18),
Public Administration 2013

ANALYSIS OF THE INSOLVENCY OF ROMANIAN COMPANIES


IN THE CONTEXT OF THE ECONOMIC CRISIS
Ph.D. Student Daniela CIOTINA
“Alexandru Ioan Cuza” University of Iaşi, Romania, Doctoral School of Economics and Business Administration
ciotina.daniela@yahoo.com

Ph.D. Student Ioan Marius CIOTINA
“Alexandru Ioan Cuza” University of Iaşi, Romania, Doctoral School of Economics and Business Administration
ianis20032002@yahoo.com

Abstract:
This paper approaches an important topic in the field of insolvency, a present field, considering that
bankruptcy threatens the development in good conditions of the activity of companies. Our approach concerns the
analysis of the insolvency of Romanian trading companies in the context of the economic-financial crisis. Considering
the current economic crisis, the problem of insolvency is very present. From an economic and financial perspective,
insolvency is a reality of entrepreneurship, with a negative impact: it is conditioned and triggers inopportune and
inappropriate management of the patrimony of economic units. Our aim is to perform a comparative analysis in time
and space of the evaluation of the insolvency of trading companies, in order to grasp the common and specific elements
in defining and presenting insolvency. In the practical part of the paper, for processing the data collected from the
financial statements, we will use the SPSS software - Statistical Package for the Social Sciences. The database includes
30 insolvent companies in Romania, analyzed over a 5-year period. For a rigorous structure of the database, we will
select the companies that perform their activity in several activity branches. The results of the research show the crisis
that affects the analyzed Romanian companies.

Key words: insolvency, insolvability, bankruptcy, ANOVA, economic-financial crisis

JEL classification: M41

INTRODUCTION

The economic crisis is a present and controversial topic. Nevertheless, the importance of this
topic is utterly uncontroversial: the effects of the crisis are painfully visible, and the only growing
index refers to the number of companies that go bankrupt. The economic climate is gradually
degrading, as anti-crisis measures take too long.
The present crisis is unique because it relies on the superposition of three types of crisis that
appeared in different moments and that have distinct characteristics: a crisis of liquidity, a financial
crisis, and a crisis of capitalism as a model. This extremely rare combination explains its extent and
its deep effects, which are incomparable with those of the recession period of 1929-1932.
As a result of globalization, the economic-financial crisis was transmitted in waves of
various amplitudes, sweeping all continents in turn. In the nowadays economic context, managers
must rethink the entire business: the investment policy, the funding policy, the commercial credit
policy. Any decision has a boomerang effect and may make the difference between continuing
activity and suspending it.
At the world level, the most important topic under debate has been related to searching for solutions
to end the crisis. The economic crisis is still a work in progress.
The effects of the crisis are similar in various economic geographic locations, but the solutions
adopted are tightly connected to the peculiarities of the business environment, to the culture and values of
society, to the existing resources, to the fiscal policy, etc.
In the context of the current economic crisis, the problem of insolvency is present. From an
economic and financial perspective, insolvency is a reality of entrepreneurship, having a negative
impact: it is conditioned and triggers inopportune and inappropriate management of the patrimony
of the economic units.

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THE CURRENT RESEARCH STATUS


 
In this paper, we approached an important topic concerning insolvency, a present problem for most
participants to the economic life that perform their activity while fearing the possibility of bankruptcy. Our
approach refers to analyzing the insolvency of the trading companies in Romania in the context of the
economic-financial crisis. Since we require a correct identification and a delimitation of the analyzed topic, it
is essential to define the specific concepts. Because the procedure of insolvability is based on the notion of
“insolvency”, the paper starts by defining and delimiting this notion (Altman, E., Marco, G., Varetto, F.,
1994).
According to Law no. 85/2006, modified by Law no. 169/2010, insolvency may be:
insolvency presumed as obvious when the debt to the creditor is not paid within 90 days, and
imminent insolvency, which appears when it is proven that the debtor will be unable to pay when
the contingent liabilities are due. Another term used when speaking about insolvency is
insolvability. Insolvability is when the debtor’s assets are higher than their liabilities.
Law no. 381/2009 concerning the introduction of preventive concordat and the ad hoc
mandate defines a new concept: “difficulty”. It must be differentiated from “insolvency” in that the
owner of the company in difficulty faces or is able to face contingent liabilities. Difficulty is
characterized by a drop in the sales figure, losses, overproduction or too high stocks, by declining
net assets and high liabilities. Also, a company in difficulty is unable to get healthy again by using
its own resources, and is in danger of getting out of the economic life on the short or medium term,
according to the legislation regarding the support from the state. Considering that unprofitable
management may actually be the source of the problems that determine insolvency, Law no.
381/2009 encourages the early start of the insolvency procedure.
The definition of insolvency given by Law no. 85/2006 confronts the available monetary
funds with liabilities. In order for the company not to become unable to pay its debts to its creditors
on the due date, its administrator must create money reserves (Shin, K.S., Lee, Y.J., 2002). The
requirement to make cash money unavailable, which contradicts the essentially dynamic nature of
the current account, determines the obligation to come with a new definition for the term of
insolvency, where the phrase “available cash” would be replace with the notion of “available
assets” (Cao, Y., Chen, X., 2012). The insolvency procedure may be considered a forced takeover
of the company’s management by creditors with the support of the syndic judge (Gestel, T.V.,
Baesens, B., Suykens, J.A.K., Poel, D.V., Baestaens, D.E., Willekens, M., 2007).
The global economic crisis determined the appearance of insolvability for many companies
that activate in Romania. There are three possible options for a company to become insolvent:
volunteer restructuring, judicial restructuring, and bankruptcy. Each one of these options implies a
specific approach, with different economic and legal effects. Insolvability has both material and
psychological results that affect the partners (managers, staff, creditors) (Fang-Mei, T., Yi-Chung,
H., 2010).
No equivalence should be considered between the notions of insolvency, bankruptcy, and
insolvability. Although Anglo-Saxon literature considered that bankruptcy and insolvency are
identical terms, European literature considers that bankruptcy is a much wider notion. The
procedure of insolvency appears as a result of the two basic principles of commercial relations, that
is, that trade is based on credit and commercial obligations are fulfilled on their due date. Therefore,
the inability to pay causes an imbalance in trade, and the intervention of justice is motivated.
Therefore, there must be a clear delimitation between the inability to pay (insolvency) and
insolvability, respectively the refuse to pay.
Usually, it is enough not to pay a single commercial debt on its due date in order to allow
the request to start the bankruptcy of a debtor. Insolvability is characterized by patrimonial assets
lower than the liabilities. This insolvability can be solved by contracting credits, which will have no
effects from a legal perspective. The impossibility to contract a credit may trigger the procedure of
bankruptcy. Insolvency is defined as the lack of liquidity, of money funds that could be used to pay
the debts on their due date, which means that insolvency is independent from insolvability. The

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immediate effects of insolvency determine the possibility for the creditors to start the procedure of
bankruptcy.

RESEARCH METHODOLOGY

Our aim is to perform a comparative analysis, in time and space, of the evaluation of the
insolvability of the trading companies, in order to grasp the common and specific elements in
defining and presenting insolvency. For processing the data collected from the financial statements,
we used the SPSS software - Statistical Package for the Social Sciences. The database includes 30
insolvent companies in Romania, analyzed over a 5-year interval. For a rigorous structure of the
database, we will select the companies that perform their activity in several activity branches.
Data analysis will provide information on the causes that determined the insolvency of the
companies. Some of the causes encountered in specialized literature are: massive investments for
starting the activity, applying a very low sales price, the existence of undiscounted cash deposits
older than 10 days. Also, another cause is that sometimes the company’s management performs an
extremely deficient activity, ignoring the clear signals of both economic-financial indicators and of
the current activity, which results in: exceeding the prescription terms of certain liabilities that thus
become unrecoverable and extreme increase of debts, especially to the state budget, the degree of
indebtedness being extremely high, inappropriate management of the relationships with the
suppliers and with the customers, usage of the owned resources with low efficiency, applying a
faulty investment policy.
We will use statistical methods to perform the analysis of the risk of bankruptcy. In this
sense, in order to make a global evaluation of the risk of bankruptcy, we will use statistical-
mathematical and patrimonial models for evaluating insolvability. The sample is made up of 30
Romanian companies that became insolvent at the beginning of the year 2011. They were selected
from the Bulletin of Insolvency Procedures published at the beginning of 2011. The analysis will be
performed both in time and in space. The considered period is 5 years, respectively 2007-2011. The
information was selected from the annual financial statements published on the Web site of the
Ministry of Public Finances. The companies selected for the sample, which will be subject to
analysis, will be grouped both according to their activity field and to the development region to
which they belong. The activity fields considered in our study are: manufacture, trade,
constructions, transport, and service provision. The sample structure according to the activity field
is presented in the pie chart below.

Structure of the sample according to the activity field

3,33%
10,00% 1,0 Field
3,0 20,00% Manufacture
6,0 Trade
Service provision
Constructions
Transport

36,67%
11,0
30,00%
9,0

Fig. no. 1 Structure of the analyzed sample according to the activity field

We can notice that most companies belong to the activity field of Service Provision,
followed by Trade and Manufacture. Only one company is included in the Transport category.
Our country is made up of eight development regions, according to their geographical position: North-
West, North-East, South-West, South-East, South, West, Center, Bucharest and Ilfov. The pie chart below presents the
sample structure according to the development region.

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Structure of the simple according to the development region

6,67%
2,0 Region
North-West
26,67% North-East
8,0 South-West
23,33% South-East
7,0 South
Center
Bucharest and Ilfov

6,67%
2,0
3,33%
1,0

23,33% 10,00%
7,0 3,0

Fig. no. 2 Structure of the analyzed sample according to the development region

From the data presented in the chart above, we can see that most companies, respectively 8,
belong to the North-West region, followed closely by the regions of the South and Center, each
composed of 7 companies in the analyzed sample. Only one company is in the South-West region,
making this region the least represented.

Table no. 1 Structure of the analyzed sample according to the activity field per region
Region * Activity_field Crosstabulation

Count
Activity_field
Service
Manufacture Trade provision Construction Transport Total
Region North-West 1 1 5 1 0 8
North-East 1 0 1 0 0 2
South-West 0 1 0 0 0 1
South-East 1 2 0 0 0 3
South 0 3 3 0 1 7
Center 2 2 1 2 0 7
Bucharest and Ilfov 1 0 1 0 0 2
Total 6 9 11 3 1 30

Bar Chart

5 Activ_field
Manufacture
Trade
4
Count Service provision
Constructions
Transport
3

0
North-West North-East South-West South-East South Center Bucharest
and Ilfof
Region

Fig. no. 3 Structure of the analyzed sample according to the activity field per region

The region with the largest number of insolvent companies is North-West, and in this
region, the companies activating in service provision have been the most affected by the crisis. In
most analyzed regions, the field of service provision is the best represented, which shows that the
effects of the economic-financial crisis were mainly felt by companies that activate in this activity
branch.

RESEARCH RESULTS

As we mentioned above, there are several indicators to take into account when analyzing the
risk of bankruptcy, respectively predicting bankruptcy. Starting from the evolution of the sales
figure and shareholders’ equity, which we used to forecast the evolution of the health of the

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companies, we computed indicators and complex ratios that provide a broad image of the financial
situation of Romanian companies. The most important indicators in analyzing the risk of
bankruptcy, presented in specialized literature, are: financial profitability, the degree of
indebtedness, profitability, general solvency (Pişleag, A., 2010).
The sales figure of the company is an indicator that reflects the economic growth of the
company, determines its strategic position, and defines the place of the company in relation to its
competitors, in the activity branch to which it belongs. For the considered sample, the sales figure is
decreasing over the analyzed period.
Table no. 2 The mean sales figure
Descriptive Statistics

N Minimum Maximum Mean Std. Deviation


CA_2007 30 ,00 25438078,00 2108666 4886904,332
CA_2008 30 7062,00 32903069,00 2689814 6849938,771
CA_2009 30 ,00 21732447,00 1822306 4354472,986
CA_2010 30 ,00 6381521,00 641907,5 1427180,721
CA_2011 30 ,00 3928614,00 255336,0 753270,12625
Valid N (listwise) 30

Fig. no. 4 Evolution of the sales figure over the period 2007-2011

The shareholders’ equity is the residual interest of the stockholders in the assets of a
company after deducting all its liabilities. The obtained results indicate a descendent evolution of
the shareholders’ equity over the analyzed period, becoming negative in the years 2010, 2011.

Table no. 3 Mean shareholders’ equity


Descriptive Statistics

N Minimum Maximum Mean Std. Deviation


CAPPR_2007 30 -191333 7684941 387573,3 1425054,882
CAPPR_2008 30 -774892 7857885 342737,4 1463877,555
CAPPR_2009 30 -3723216 7860962 83089,73 1656008,523
CAPPR_2010 30 -5804801 6353300 -180750 1654549,894
CAPPR_2011 30 -5969783 125685,00 -529257 1186847,576
Valid N (listwise) 30

Fig. no. 5 Evolution of the shareholders’ equity over the period 2007-2011

The degree of indebtedness is a general indicator of indebtedness and computes the


proportion to which total assets are funded by other sources than the shareholders’ equity, such as
credits, suppliers, and debts to the state. This indicator is the reverse of patrimonial solvency and

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may have values smaller than or equal to 1. In normal activity conditions, the degree of
indebtedness must be around 0.5. A limit under 0.3 indicates a reserve in resorting to credits and
loans, and over 0.8, a dependence on credits, which is alarming.
The mean for this indicator was computed for only 26 companies in 2011 because of the null
value of the total asset for 4 companies. We can notice that the mean values of the degree of
indebtedness are very high, most exceeding the threshold of 1. This indicates complete dependence
of the companies on external loans.
Table no. 4 Mean degree of indebtedness
Descriptive Statistics

N Minimum Maximum Mean Std. Deviation


GI2007 30 11,79 198,79 94,4376 37,81323
GI2008 30 23,14 288,28 109,2873 50,56255
GI2009 30 23,27 432,20 140,9565 98,03264
GI2010 30 23,54 554,66 182,9329 141,02960
GI2011 26 -145,00 473,35 151,9853 117,58224
Valid N (listwise) 26

Fig. no. 6 Evolution of the degree of indebtedness over the period 2007-2011

The efficiency of a company’s usage of the resources in order to obtain profit is measured
using profitability indicators. The vital objective for the survival of a trading company is obtaining
profit on the long term, as this is the source that pays benefits to the shareholders for the social
capital brought as a contribution. The indicator used into the analysis was computed as the ratio
between the net result and the sales figure.
As we could see above, the net result was negative in the years 2008, 2009, 2010, and 2011,
which leads to obtaining a profitability indicator with negative values for these years. The only year
for which the mean computed for the analyzed indicator had a positive value is 2007. This value of
2.37% indicates a low mean profitability for the 30 companies included into the analysis.

Table no. 5 The mean profitability indicator
Descriptive Statistics

N Minimum Maximum Mean Std. Deviation


Profitab2007 29 -57,68 109,72 2,3683 32,21726
Profitab2008 30 -122,85 77,50 -1,6164 34,19631
Profitab2009 28 -245,50 127,29 -24,7252 76,77546
Profitab2010 27 -2041,86 125,32 -105,8088 390,48211
Profitab2011 15 -1010,89 24,84 -116,3303 262,36158
Valid N (listwise) 14

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Fig. no. 7 Evolution of profitability over the period 2007-2011

The earnings of the company in relation to the shareholders’ contribution to funding the
business are shown by profitability indicators. Financial profitability was computed as the ratio
between the net result and the shareholders’ equity. High profitability of the shareholders’ equity
means that a small material investment of the shareholders was transformed into high profit, and
this is the important for a business: maximize the results expected by the shareholders as a result of
the investment they made.
The mean values of financial profitability indicate the problematic situation of the
companies, which becomes more poignant in time, as the indicator has a negative mean value in the
year 2011.
Table no. 6 The mean profitability indicator
Descriptive Statistics

N Minimum Maximum Mean Std. Deviation


Rentab2007 30 -,47 106,28 4,1772 19,29717
Rentab2008 30 -1,22 8,82 ,7048 1,95629
Rentab2009 30 -2,18 2,73 ,3177 ,92829
Rentab2010 30 -2,95 2,77 ,2833 ,96810
Rentab2011 29 -18,99 ,78 -,6074 3,56202
Valid N (listwise) 29

Fig. no. 8 Evolution of financial profitability over the period 2007-2011

The general solvency ratio (GSR) reflects the ability of a company to pay all its short,
medium, and long term debts. It is computed as the ratio between total assets and total liabilities.
This indicator reflects the coverage of the debts with assets and the possibility of the company to
transform its assets into cash, in order to honor its payment obligations.

Table no. 7 Mean general solvency ratio


Descriptive Statistics

N Minimum Maximum Mean Std. Deviation


RSG2007 30 ,50 8,48 1,4503 1,46567
RSG2008 30 ,35 4,32 1,1303 ,71467
RSG2009 30 ,23 4,30 1,0356 ,77424
RSG2010 30 ,18 4,25 ,9124 ,82977
RSG2011 29 -,69 4,25 ,7483 ,81349
Valid N (listwise) 29

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Fig. no. 9 Evolution of the general solvency ratio over the period 2007-2011

Using the correlation analysis and the regression analysis, we will look at the connection
between financial profitability, as a dependent variable, and the degree of indebtedness,
profitability, and general solvency ratio, as independent variables. In order to determine this
connection, we will use the SPSS software.

Table no. 8 Correlation analysis using the Pearson coefficient


Correlations

Rentab GI Profitab RSG


Rentab Pearson Correlation 1 -,048 ,075 -,042
Sig. (2-tailed) ,800 ,693 ,827
N 30 30 30 30
GI Pearson Correlation -,048 1 -,102 -,625**
Sig. (2-tailed) ,800 ,593 ,000
N 30 30 30 30
Profitab Pearson Correlation ,075 -,102 1 ,198
Sig. (2-tailed) ,693 ,593 ,294
N 30 30 30 30
RSG Pearson Correlation -,042 -,625** ,198 1
Sig. (2-tailed) ,827 ,000 ,294
N 30 30 30 30
**. Correlation is significant at the 0.01 level (2-tailed).

The obtained results show the existence of a connection between the considered indicators.
The value of the Pearson correlation coefficient suggests the existence of an indirect connection
between financial profitability and the degree of indebtedness, respectively the general solvency
ratio, and a direct connection between financial profitability and profitability.
In order to estimate the parameters of the regression model, the following results have been
obtained using the SPSS software. SPSS draws a model using all the independent variables, through
the Enter method.
Table no. 9 The method used in drawing the model
Variables Entered/Removed b

Variables Variables
Model Entered Removed Method
1 RSG, a . Enter
Profitab, GI
a. All requested variables entered.
b. Dependent Variable: Rentab

The equation of the resulting regression model is the following:


Rentab = 2.801 – 0.007*GI + 0.004*Profitab – 0.730*RSG
The negative value of the coefficient of factor variables indicates that there is a reverse
variation between the indicators, the increase in the degree of indebtedness and the general solvency
ratio having a negative influence over the evolution of financial profitability. On the other hand, the
positive value of the coefficient of the Profitability factor variable shows the existence of a direct
variation between the indicators, the increase in the profitability having a positive influence on the
evolution of financial profitability.

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Table no. 10 The resulting regression model


Coefficients a

Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) 2,801 3,050 ,919 ,367
GI -,007 ,013 -,125 -,503 ,619
Profitab ,004 ,008 ,090 ,453 ,655
RSG -,730 1,339 -,138 -,545 ,590
a. Dependent Variable: Rentab

In table no. 13, the value of R square shows that 19% of the variance is explained by the
regression model, and respectively the regression factors (degree of indebtedness, profitability,
general solvency ratio) explain 19% of the variance of financial profitability.

Table no. 11 Explanation of the model using the determination coefficient


Model Summary

Adjusted Std. Error of


Model R R Square R Square the Estimate
1 ,136a ,019 -,095 4,24839
a. Predictors: (Constant), RSG, Profitab, GI

Table no. 12 The ANOVA output


ANOVAb

Sum of
Model Squares df Mean Square F Sig.
1 Regression 8,863 3 2,954 ,164 ,920a
Residual 469,268 26 18,049
Total 478,131 29
a. Predictors: (Constant), RSG, Profitab, GI
b. Dependent Variable: Rentab

The ANOVA table presents the results of the analysis of the variance of the dependent
variable under the influence of regression factors and the residual factor. This means that it presents
information on the sum of the squares of the deviations of the dependent variable, caused by the
regression model and by the residual factor, the degrees of freedom, the estimations of the variances
caused by the two sources of variance (regression and residue), the F and Sig ratio. The sig value for
F is not smaller than 0.05, therefore the linear relation between the considered variables is not
significant.

CONCLUSIONS

The internationalization of the markets dominates the present economic activities.


Companies are therefore forced to continuously look for ways to innovate and restructure. The key
to survival in such an environment is adapting to the rhythm of change, turning to profit essential
features: time, quality, quantity, and costs.
The government is the main pawn, together with the business environment, in stimulating
economy, which will determine our economic future. Nowadays, companies no longer wander if
they will encounter a major crisis in the future, but when, what type of crisis it will be, and how it
will affect the company.
If in the periods of economic growth, insolvability appears as an isolated case, while in the
conditions of an economic crisis, it becomes a continuous threat for any company. But to what
extent can financial-accounting forecast calculations anticipate the future of a business? Can
accounting foresee and prevent insolvency? What is the role played by the economic-financial
analysis? Definitely, a diagnosis analysis might provide a partial answer concerning the future of

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the activity and indicate the weaknesses to be corrected and the strengths to be capitalized upon.
Maintaining insolvent debtors for a longer time in the trading system, without removing or
reorganizing and reintegrating them, preserves the block of the commercial relations in which they
are part, which results in restraining the freedom of action and in degrading the activity conditions
of the other traders as well.
In conclusion, the only way to survive is rethinking the organization processes, both
internally and externally. In the conditions of the lack of credits, of the low number of customers, of
burdening taxation, of largely diminished export operations, reorganization is a solution for the
present economic-financial problems. The complexity of the events prevents us to consider
reorganization as the unique answer to all problems. There is no universally applicable recipe. Each
company must compute its own costs in order to see which scenario fits it best.
In the analysis performed, we took into consideration only companies in difficulty,
respectively those that started the insolvency process in the year 2011. In future studies, we will
consider both bankrupt companies and companies with no financial difficulties in constructing our
sample, in order to draw a statistical model for predicting bankruptcy.

BIBLIOGRAPHY

1. Altman, E., Marco, G., Varetto, F. (1994). Corporate distress diagnosis: Comparison using
linear discriminant analysis and neural network (the Italian experience). Journal of Banking
and Finance 18, 505-529.
2. Cao, Y., Chen, X. (2012). An aget-based simulation model of enterprises financial distress
for the enterprise of different life cycle stage. Simulation Modelling Practice and Theory 20,
70-88.
3. Fang-Mei, T., Yi-Chung, H. (2010). Comparing four bankruptcy prediction models: logit,
quadratic interval logit, neural and fuzzy neural networks. Expert Systems with Applications
37, 1846-1853.
4. Gestel, T.V., Baesens, B., Suykens, J.A.K., Poel, D.V., Baestaens, D.E., Willekens, M.
(2007). Bayesian kernel based classification for financial distress detection. European
Journal of Operational Research 172, 979-1003.
5. Pișleag, A. (2010). The importance of assesing the risk of bankruptcy under the current
global crisis. Bulletin of the Transilvania University of Brasov, vol. 3(52), Series V:
Economic Sciences, 291-298.
6. Shin, K.S., Lee, Y.J. (2002). A genetic algorithm application in bankruptcy prediction
modelling. System Experts with Applications 23, 637-346.

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of Economics and Issue 2(18),
Public Administration 2013

THE IMPACT OF NEW REGULATION ON FOUR EUROPEAN


BANKING SYSTEMS. A BASEL III APPROACH
Ph.D. Student Anamaria AVADANEI
Alexandru Ioan Cuza University of Iasi, Romania, Doctoral School of Economics and Business Administration
anamaria_avadanei86@yahoo.com

Abstract:
One of the solutions designed to rebuild the banking system is the reconfiguration of the regulatory framework.
Still active, the episodes of liquidity shortage and bank failure ask for solid measures in order to increase the solidity of
individual institutions, to protect the financial stability of the banking systems and to maintain confidence on the
markets. The aim of this paper is to analyze the situation of four European banking systems (Czech Republic, Poland,
Romania and Croatia) in terms of Basel III standards. Structured on three parts, the study points out the real concerns
regarding Basel III effectiveness; analyzes the evolutions of capital, leverage and liquidity indicators and highlights the
future possible scenarios/actions for aligning to the new regulation. To conclude, we determine the white and the black
spots of the selected banking systems related to Basel III implementation. The results show good levels of capital in
Poland, Czech Republic, Croatia and Romania, and some liquidity issues in Poland. The Czech and the Croatian
banking systems are the best prepared for shocks.

Key words: Basel III, banking system, risks, liquidity, crisis

JEL classification: G01, G21, G32

INTRODUCTION

The stability of the banking system is a precondition for financial stability, but deficiencies
and weaknesses of supervision ask for efficient instruments in order to prevent and manage shocks
in the interbank network. The construction of a crisis is based on excessive liquidity, credit
expansion and low capital levels.
In December 2010, Basel Committee on Banking Supervision developed a new agreement: Basel III
- International framework for liquidity risk measurement and A global regulatory framework for
more resilient banks and banking systems (BIS, 2010). The three main directions of Basel III are
related to new capital minimum requirements, banking supervision and market discipline.
In this paper we propose to analyze the implications of Basel III implementation in four
European banking systems and to find the best actions for future activities.

THE EFFECTIVNESS OF BASEL III

The fundamental changes between Basel I-II and Basel III consist of the orientation to both
individual and macro risks. The question is: how effective are new measures expected to be? Some
voices argue that implementation of Basel III standards may affect domestic financial markets with
negative effects on credit growth and economic activity. In 2000, Greenspan sustained in an
interview that regulation will be the subject of future changes which could lead to reduction of
living standards on long-term. After 12 years this topic might be very realistic in the lights of future
demands. Restrictive capital requirements have positive impact: high capital stocks are designed to
absorb losses generated by financial crises and to maintain market confidence [1]. Greenspan argues
that such dimensioning of capital against risks which appear once in 50-100 years is inappropriate
because will lower the living standards. Méaulle (2011) presents several hypothesis that might find
inappropriate the implementation of Basel III: first of all, it should be a clear distinction between
illiquid banks and insolvable banks, it is clear that the requirements will differently affect the
financial institutions; secondly, new capital standards will decrease the possibility of systemic risk
manifestation, but still, banks can be very well capitalized and can create the occurrence of systemic
risk. Nicholas Le Pan (2008) points out other aspects, such as: differences between global banks

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and small banks regarding complexity and approach of new regulation; the types and the
characteristics of financial supervisors in European Union countries and in non-EU countries or the
business models of banks.

Capital requirement
Required capital ratio (+) = Capital (-)/ RWA (+) (1)

12 Countercyclical Buffer
2,5

2,5 Capital Conservation


1,3 1,9 Buffer
8 0,6
2,5 2 2 2 2 2 Tier 2 Capital
4 3,5
1,5 1,5 1,5 1,5 1,5 1,5
4 1 Tier 1 Capital
2
3,5 4 4,5 4,5 4,5 4,5 4,5
Core Tier 1 Capital
2
0
2012 2013 2014 2015 2016 2017 2018 2019

Figure no. 1 The Calendar of Basel III Capital Requirements


Source: [8]

Minimum capital requirements (figure no. 1.) are completed by leverage ratio (minimum
3%) considered flexible enough to be used as micro and macro instrument or as a countercyclical
tool. As advantages, leverage reshapes the balance sheet volume, limits the excessive exposure, it
is easy to monitor, its implementation does not imply significant costs and complex procedures.
The main disadvantage is considered the reduced potential of growth, with effect on economic
growth. Another danger is that banks are more exposed to risks, considering the fact that there is no
distinction between risky assets and the balance sheet may be vulnerable. Also, there is no universal
definition of financial leverage and for some banks competitive advantages may appear.

Leverage Ratio
Tier 1 Capital/Exposure >3% (2)
Basel III liquidity standards (Liquidity Coverage Ratio and Net Stable Funding) are
designed to protect banks from short-term and long term liquidity issues [7].
Liquidity Coverage Ratio (LCR)
Stock of high-quality liquid assets/ Total net cash outflows over the next 30 calendar
days=100% (3)

Net Stable Funding Ratio (NSFR)


Available amount of stable funding/Required amount of stable funding>100%
(4)

The implementation of the liquidity standards generates concerns, considering the


followings:
 The new definition of high-liquid assets reduces the stock of liquidity. There is a gap
between the characteristics of refinancing instruments used by central bank and the features
of the new requirements.
 The situation of cross-country liquidity support is uncertain. The application of liquidity
standards was proposed for the consolidated level, but the European Commission advised to
be implemented also in the host countries. Applying liquidity standards at the national level

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may lead to shortages of internal liquidity transfers and to large gaps between banking
systems from Euro zone and the other banking systems;
 Reduction of growth and development role of cross-country banking groups. Considering
Basel III liquidity requirements, the funding relations between mother banks and
subsidiaries will be less fluid, with effects on increasing fragility of liquidity management
inside capital markets [2].
From a rational point of view, the liquidity standards aim to prevent banks from relying
solely on anticipated inflows, but for some banks liquidity is trapped at a certain level even if the
inflows exceed outflows and the indirect effect can be seen on profitability.

CASE STUDY

Discussions on Basel III concluded the real impact of its implementation on European
banking. Differences are to be seen considering the banking models, practices and activities. For the
analysis we choose four European banking systems (Croatia, Czech Republic, Poland and Romania)
based on both similarities (the membership in the European Union, Croatia will be integrated in
July 2013) and differences (national regulation and standards).
Increasing quality, consistency and transparency of bank capital as an important Basel III
goal starts with a capital redefinition: while under Basel II capital was divided in Tier 1, Tier 2 and
Tier 3, now, banks have to align to 6% minimum Tier 1 capital and 8% Tier 2 capital until January
2015, Tier 3 capital being no longer used.

Croatia Czech Republic
16,6 18,8 19,1
20 15,4 17,5 20 15,5 15,3
15,2 15,3 14,1
15 15 12,3 12,6 13,9 14,2
11,1
10 10
5 5
0 0
2008 2009 2010 2011 2008 2009 2010 2011

Capital adequacy ratio Capital adequacy ratio
Tier 1 capital to risk‐weighted assets Tier 1 capital to risk‐weighted assets

Poland
Romania
20 20
13,3 13,9 13,1 13,8 14,7 15 13,4
15 11,2 12 12,5 11,8 13,4 14,2 12,9
15 11,8
10,1
10 10
5 5
0 0
2008 2009 2010 2011 2008 2009 2010 2011

Capital adequacy ratio Capital adequacy ratio
Tier 1 capital to risk‐weighted assets Tier 1 capital to risk‐weighted assets

Figure no. 2 The Evolution of Capital Adequacy Ratio (CAR) and Tier 1 Capital in the
Selected Banking Systems during 2004 and 2011
Source: [12]

The evolution of capital ratios in the selected banking system shows good levels of capital,
above the minimum requirements. Croatian banking system is the most well capitalized, the
increasing trend being determined by the growth in loans to domestic government units which led to
a fall in the average credit risk weight and capital requirements. However, in June 2011 one bank
reported CAR below 12%, the legal standard. The Czech banking system has similar evolutions,
most banks having high quality of capital; the Basel III requirements will have a limited impact on
banking activity. In Poland, capital ratios have comfortable levels, increased capital and liquidity
requirements have boosted buffers to deal with credit and liquidity risks that could arise if the zloty

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depreciates. The impact of new capital standards in the Romanian banking system will be limited as
well. In June 2011 Tier 1 capital ratio represented 80% of total capital and CAR was 13.4%, far
above the minimum 8% required (figure no. 2.). Still, banks should make adjustments of the
business profile in order to increase liquidity and profitability.
Czech Republic
Croatia
13,9 13,5 12 11,4
13 13,7 13,8 15 10,9 11,1
11,5
15
10 10
5 5
0 0
2007 2008 2009 2010 2011 2007 2008 2009 2010 2011

Equity capital/total assets Equity/assets

Romania Poland‐LR‐June 2011
40 12
26,7 10 10
30 22,2
15 8
9,14 8,13 8,11 7 4
12 7,55 7,79 20 5 6
9 2 5 37,8
9,3 4
6 10
3 0 2,6 1,3 2
0 0 0
2007 2008 2009 2010 2011 <0%‐ <3%‐ <5%‐ <6%‐ <7%‐ <8%‐ >=10%
3% 5% 6% 7% 8% 10%
Tier 1 equity/total average assets
% Total assets No. of banks

Figure no. 3 The Evolution of Leverage Ratio (LR) in the Selected Banking Systems
Source: [10] - [11] - [13] - [14]

According to figure no. 3, the Polish banking sector is much less leveraged compared to the
rest of selected banking systems. In June 2011, 10 banks representing 37.8% of total assets had
leverage ratios between 7% and 8%. Basel III 3% minimum requirement is not a concern because
during 2007 and 2011, the indicator registered high values.

Table no. 1 Liquidity Standards in the Polish Banking System - June 2011
LIQUIDITY COVERAGE RATIO (%)
% 0-50 50-80 80-100 100-150 150-250 250-400 >400
No. of banks 6 3 2 8 2 4 8
% Total assets 6.4 8.2 6.7 58.8 15.6 2.8 1.4
NET STABLE FUNDING RATIO (%)
% 0-70 70-90 90-100 100-110 110-120 120-140 >140
No. of banks 4 6 7 7 4 2 3
% Total assets 7.5 10.5 38.2 18.8 13.5 10.3 1.1
Source: [10]

A survey based on a sample of 33 Polish banks representing 60% of the banking sector
shows that one of the main problem regarding Basel III implementation is the liquidity standard. As
we can see in the Table no. 1, in June 2011, 11 banks had LCR<100%, while more than half of the
questioned banks did not achieve the long-term liquidity requirement (NSFR<100%). For several
years, lack of long-term liquidity, a deficiency of the Polish banking system, caused a significant
liquidity gap. In the Croatian banking system, liquidity risk is determined by significant dependence
on parent banks for financing. Local banks are exposed to risks through higher funding costs and
lower inflows. High level of liquidity in the Czech banking system is evidenced by low loan-to-
deposit ratios (75% in September 2011) and limited currency mismatches in the balance sheet.

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BASEL III SCENARIOS

A short analysis of the selected banking systems strengths and weaknesses presented in table
no. 2 is the preface in determining the best individual actions for Basel III implementation.

Table no. 2 Strengths and Weaknesses of the Selected Banking Systems


Strengths Weaknesses
Czech Republic
- One of the lowest loan-to-deposit ratio - Credit contraction (to zero in late 2009);
in the European Union (73% in 2011); - Deterioration of assets quality (but still at
- The position of net creditor to the confortable levels compared to other
parent-banks in Euro area; European countries).
- Capital adequacy ratios far above
the minimum requirements.
Croatia
- Foreign ownership; - Balance sheet exposures to foreign
- Internal minimum capital requirements set at currency risk;
12%; - The pressure of external debt on
- Experience in many types of commercial banking banking growth;
activities; - Contagion and liquidity risks arise
- Extensive branch systems with positive effects on from dependence on foreign banks for
business (easy access to clients and potential funding.
clients).
Poland
- Low interest in risky foreign transactions; - Reduced access to credit for Small and
- Limited lending expansion ex-ante the financial Medium Enterprises (SMEs);
crisis; - Liquidity and funding issues;
- Low dependency on loans in foreign currency. - Increasing borrowing costs.
Romania
- Good levels of solvability and liquidity indicators -Higher costs of external financing;
(above the minimum requirements); -Deterioration of portfolios quality;
- Agreements for maintaining the exposure of -Risk accumulation (contagion risk
parent banks; and credit risk);
- The support of National Bank of Romania - Credit contraction;
(liquidity reserves, monetary and prudential - Reduction of profitability.
measures, interventions for sustaining exchange
rate deviation).
Source: [1] - [14]

As possible scenarios, the responses to Basel III changes can be operational, tactical and
strategic. For example, in Poland, the new liquidity standards will probably lead to a reorganization
of banking balance sheet and the withdrawal of certain products considered unprofitable. For the
long-term issues, urgent expansion of local sources of financing is required. In Romanian banking
systems, the reactions could be related to the alignment period to Basel III requirements: banks will
implement tactical measures as asset restructuring (credit reduction in order to increase capital
levels).

Table no. 3 Possible Scenarios to Basel III Changes


Response Operational Tactical Strategic
Indicator
Orientation +Efficiency +Profitability + Profitability
-Costs (Short-term) (Long-term)
Directions  Processes  Pricing  Business Model
 Methods  Funding  Group Organization
 Data  Asset Restructuring  Equity
Actions 1. RWA 1. Risk-sensitive pricing 1. Sale of units
Optimization 2. Orientation to long-term 2. Restructuring process

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2. Rethink of Credit funding (HR, business units,


approval 3. Lower exposure activity)
Source: [6]

Czech banking system will apply tactical measures as well considering that in 2011
profitability decreased 4% (a good evolution compared to other banking systems). Asset quality
improved based on high degree of resilience in terms of liquidity and a reduced level of
indebtedness integrated in a conservative business model.

CONCLUSIONS

Basel III was designed to protect banks from future crisis, setting new rules for capital,
liquidity, leverage and risks. Apart from its benefits, Basel III generates concerns, as follows:
forcing banks to maintain higher capital ratios may make them reluctant to expand credit,
potentially undermining the recovery, even lower the living standards; new liquidity requirements
will lead to a decreasing trend of profitability, reduction of banking activity and higher costs.
According to our analysis, the selected banking systems will not be massively affected by
the new approach, but there are some problems to be solved. The new liquidity standards are going
to be a real challenge for the Polish banking system. The main threats in the near term are
connected with potential funding problems and with a possible deterioration of asset quality.
According to financial indicators, Croatian and Czech banking systems are the most stable and
prepared to face shocks. The Romania banking system deals with a credit contraction, but has good
levels of capital and liquidity. A mix of operational, tactical and strategic measures must be applied
in order to meet Basel III standards.

Acknowledgements
This work was supported by the European Social Fund in Romania, under the responsibility
of the Managing Authority for the Sectorial Operational Program for Human Resources
Development 2007-2013 [grant POSDRU/107/1.5/S/78342].

REFERENCES

1. Angelini, P., Clerc, L., Curdia, V., Gambacorta, L., Gerali, A., Locarno, A., Motto, R., Roeger,
W., Van den Heuvel, S. J. and Vlcek, J., Basel III: Long-term Impact on Economic Performances
and Fluctuations, Working Paper No. 338, BIS, 2011, http://www.bis.org/publ/work338.pdf
2. Avadanei, Anamaria, Tomuleasa Iuliana, The Impact of Basel III in Eastern European Banking.
A Comparative Case Study, Proceedings of the 6th International Conference Globalization and
Higher Education in Economics and Business Administration, ISBN 978-973-703-766-4, pp.
670-679, Iași, 2012
3. Lehmann, Alexander, Levi, Micol, Tabak, Peter, Basel III and Regional Financial Integration in
Emerging Europe. An overview of Key Issues, EBRD Working Paper, No. 132, 2011,
http://www.ebrd.com/downloads/research/
economics/workingpapers/wp0132.pdf
4. Le Pan, Nicholas, Remarks on Basel II, February 2008,
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1088510
5. Méaulle, Matthieu, The Basel III Agreement: a critical survey, May 2011,
http://www.astrid-online.it/Regolazion/Studi--ic/FEPS_Basel_III_11_05_11.pdf
6. *** Accenture, Basel III and Its Consequences: Confronting a New Regulatory Environment,
2011, http://www.accenture.com/SiteCollectionDocuments/PDF
/Accenture_Basel_III_and_its_Consequences.pdf

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7. *** Bank for International Settlements, Basel III: International Framework for Liquidity Risk
Measurement, Standards and Monitoring, 2010, http://www.bis.org/publ/bcbs188.htm
8. *** Bank for International Settlements, Basel III: A Global Regulatory Framework for more
Resilient Banks and Banking Systems, 2010, http://www.bis.org/publ/bcbs189.htm
9. *** Financial Stability Board, IMF, World Bank, Identifying the Effects of Regulatory Reforms
on Emerging Market and Developing Economies: A Review of Potential Unintended
Consequences, Report to the G20 Finance Ministers and Central Bank Governors, 2012;
10. *** PwC Poland, Basel III. Quantitative Impact Study for Polish Banking System: summary
of findings, 2011,
http://www.pwc.pl/en_PL/pl/publikacje/PwC_Summary_of_Polish_Basel_III_QUANTITATIV
E_IMPACT_STUDY_DEC_2011.pdf
11. *** Czech National Bank, Selected Financial Stability Indicators 2012;
12. *** IMF Financial Indicators 2008-2011;
13. *** National Bank of Croatia, Financial Indicators 2007-2011;
14. *** National Bank of Romania, Financial Stability Report, 2011.

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of Economics and Issue 2(18),
Public Administration 2013

THE ROLE OF ACCOUNTING SYSTEM CLASSIFICATION IN


THE OPTIMIZATION OF INTERNATIONAL HARMONISATION
PROCESS
PhD Student Geanina MĂCIUCĂ
Stefan cel Mare University of Suceava, Romania
geaninasth@gmail.com

Lecturer PhD Marian SOCOLIUC
Stefan cel Mare University of Suceava, Romania
marians@seap.usv.ro

Abstract:
The main objective of international accounting bodies is represented by worldwide accounting harmonisation.
However, this process faces difficulties which arise from matters specific to each country, either from the complicated
nature of international financial reporting standards, from interpretation, from language and terminology problems or
from the different nature of the principles, procedures, methods and accounting practices nationwide. The degree of
awareness of the differences and similarities between national accounting systems serves as a basis for the
international accounting classifications, this classification being needed to better understand the difficulties faced by
accounting experts related to the harmonisation process.

Key words: international accounting, accounting systems, harmonisation, international classification, accounting
practices

JEL classification: M41

INTRODUCTION

Worldwide, there are no identical accounting practices in different countries. However, there
are countries that have in common the same influences. Although studies and research on the
administrative processes have undergone some serious changes, in parallel with the spreading of the
process of accounting unification promoted in the European Union, with a particular acceleration in
the last thirty years, there are still differences. Thus, relevant for the international context are the
legal, cultural, historical differences even between the EU member states (Saita et al, 2012, p. 9).
Awareness of this diversity and of the demands imposed by globalisation has led in recent years to
the phenomenon of harmonisation of accounting standards by IASB and the European Community.
The classification of the accounting systems is first and foremost a tool for comparing
different national accounting regulations and practices in order to group countries thus providing
elements that characterize a country’s accounting system, without needing to know all their rules
and accounting practices. Although the starting points are different, (accounting classifications have
as starting point the similarities between accounting rules and practices within countries, while
accounting harmonisation is based on the differences existing between rules, accounting practices,
in the same country or from different ones) the fundamental role the primary role of an accounting
classification consists in assessing the difficulties of carrying out the international accounting
harmonisation policies.
For this paper, we used, as a research method, qualitative research which is based on
interpretation. In this respect, for this paper we studied articles and papers in the field with the
motivation that in the “IFRS era” understanding the differences and similarities between national
accounting systems is absolutely necessary for international accounting harmonisation. Starting
from this assumption and from the fact that in any field classification “is a fundamental process in
the better understanding of phenomena” (Nobes, 2011, p.267), we presented the main approaches
accepted by the literature of the field. Furthermore, we considered that the most recent classification

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made by Nobes in 2011 expresses the best the fact that international accounting harmonisation
specialists still face problems arising from national practices.

LITERATURE REVIEW

We believe that before talking about the multitude of accounting systems, on an international
level, we must define the notion of international accounting, in which these systems gain important
meanings. Thus, international accounting is the science which studies the reasons for the differences
between accounting systems as well as the functions associated with the international financial
reporting system. The study approaches for the field can be summarised as follows: universal
approach (according to which the accounting function is a common requirement, the objective being
the development of the general typology), historical approach (according to which the objective of
accounting is to study to study history to understand the causes of diversity), contingency approach
(according to which the objective of accounting is to identify the external factors and the way in
which they influence the characteristics of the accounting systems) (Aureli, p.4).
The external factors can be divided according to the following typology: institutional (legal
system, economic system), economic (financial system, the economic role of the state), socio-
cultural (culture, linguistic differences, the role of doctrine and of occupation, the skills of the
entrepreneurial team) (Aureli, p.6).

External factors
(environmental)
Collective
Entity-environment objectives and
report interests

Financial reporting
function according Legislative
to the operator intervention

The evolution of
the accounting
system

Source: Aureli, S., Principi contabili internazionali,Facolta di Economia, URBINO, p.5

Figure 1- The influence of the external factors on the evolution of the accounting
system

One of the most important external factors is the legal system. On an international level, two
systems are predominant: the common law system and the Roman legal system. The countries that
are part of the common law system (the system has its roots in the United Kingdom but has been
applied in many countries under English influence) have a system made up of a limited number of
laws in which it is sought to satisfy a specific case rather than formulate a general rule for the
future. In contrast, other cultures and nations have used a system based on the Roman legal system.
Business law, which governs, on a wide scale, the financial reporting structure, takes shape from
this culture. The differences between the legal approach of common law and the Roman legal
system have influenced the accounting standards and accounting practices.

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The first attempts to classify accounting systems goes back to over a century ago (in 1911
Hatfield’s classification consisted of three groups: USA, the United Kingdom of Great Britain and
Northern Ireland and continental Europe) but the researchers’ interest in the field increased in the
60s. In the following decade emphasis was placed on the empirical grounding of the undertaken
studies while in the 80s and 90s it constituted the most important part of international accounting
research (Bogdan, 2004, p.88).
To better understand and describe the differences between the accounting systems, their
classification can help. Nobes and Parker propose a classification of the accounting systems using
the following taxonomy: extrinsic (deductive) and intrinsic (inductive). The deductive approach
implies the classification of accounting systems based on the identification of the relevant
environmental factors (legal system, tax system, culture, level of economic development, etc.). The
inductive approach implies the classification of accounting systems based on the analysis of
accounting practices (Nobes and Parker, 2008, pp.69-70).
The starting point in the deductive analysis of accounting systems is given, in 1967, by
Mueller, when he identifies four development models for accounting systems: macroeconomic,
microeconomic, accounting as an independent discipline, uniform accounting (Tabără et al., 2010,
pp. 82-83).
The AAA (American Accounting Association) classification of 1977 is an attempt in
describing all of the major characteristics which influence the accounting systems. The American
Accounting Association identified eight influences called accounting system “parameters”: political
system, economic system, economic development, financial accounting objectives, the origins of
accounting norms, education and accounting training, enforcement of ethical norms, the client
(Roberts et al, 2005, pp.214-216). Based on this morphology, the American Accounting Association
identified five influence zones (Bogdan, 2004, p.90): British, French-Spanish-Portuguese, German- 
Dutch, communist, American.
Between 1990 and 2000, other researchers have proposed other accounting system
classifications. In this respect, we must emphasize Nobes’ theory which establishes the
differentiation factors that allow a more accurate classification of accounting systems: the typology
of users of accounting information from financial reports of listed entities, the degree in which laws
and standards impose details while excluding subjective judgements, the importance of taxation
rules, the caution and precision in applying historical cost, writing practices of consolidated
financial reporting, entity uniformity in rule application.
In 1983, Christopher Nobes set up the first hierarchical classification based on the financial
reporting system (Pântea, Cristea, 2009, p.38) identifying two orientations: micro and macro. In
turn, they are grouped into subclasses, families and species.
In the microeconomic-oriented countries, elements of judgement, the concept of fair view
and the market-based economic adjustment prevail. Holland (which is strongly oriented towards
business), Australia, New Zeeland, the United Kingdom and Ireland (with professional rules
derived from business practices of British origin), Canada and the United States (with professional
rules derived from business practices) are an example in this respect.
In the microeconomic-oriented countries, uniformity in the application of measurement
methods is predominant (Tabără et al, 2010, p.90). Italy (with a system based on the Civil Code and
international influences), France, Belgium and Spain (with an accounting system based on unified
account plans), Germany and Japan (with an accounting system based on statutory rules), Sweden
(with an accounting system based on economic control imposed by the tax system) are an example
in this respect.
This classification was developed prior to the adoption of EU directives and before the
adoption of IFRS by companies in any of the countries taken into consideration (Nobes, 2011,
p.14).
In 1988, Gray found that the importance of culture does not seem to be fully appreciated and,
starting from Hofstede's study of 1980, identified four cultural values which influence accounting
practices (Gray, 1988, pp.6-11): professionalism versus statutory control, uniformity versus

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flexibility, conservatism versus optimism, secrecy versus transparency. The model proposed by
Gray, based on cultural influences, was a way to show the impact of culture on accounting and the
connection between culture, accounting values and accounting practices (Cigdem, Sonan, 2007,
p.150).

Financial reporting

CLASS Strong foreign capital


Weak foreign capital

FAMILY Anglo-Saxon
„Etiquette”

SYSTEM

UK GAAP IAS GAAP US GAAP


French German Italian

standards standards standards


Source: Roberts, C., Weetman, P., Gordon, P, International Financial Accounting. A Comparative Approach,
Prentice Hall, 2005, pg.220
Figure 2-Accounting system classification (Nobes, 1998)

On an international level we need to distinguish between credit countries/insider (countries


financed mainly by banks) and equity countries/outsider (countries financed directly by investors).
This aspect is important because these differences affect international financial reporting standards
(Saita et al, 2012, p. 12). In 1998, Nobes believed that the most important factor in explaining the
differences between accounting systems  is the financing system which may vary from country to
country.
Thus, he divides the financial reporting systems into two classes: A and B. In class A we can
find the countries with strong funding through external equity, corresponding to the Anglo-Saxon
systems: United Kingdom, New Zeeland. In class B we can find countries with low equity through
external equity, corresponding to the continental Europe accounting systems (Nobes and Parker,
2008, pp.218-220).
In the international accounting literature, Gray's classification made in 1988, based on the
analysis of cultural factors, and the classification made by Nobes in 1998, according to the
influence of the funding system, play an important role.

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The main criterion used in the inherent classification of accounting systems is the nature of
accounting practices. Nair and Frank’s research (1980) has, as a starting point, the data provided by
Price Waterhouse in 1973 and 1975. The data on the assessment practices was separated from the
data on accounting disclosure practices. The result of the research was the classification of
accounting systems into two groups: a group based on assessment practices and a group based on
accounting disclosure practices.
In 2008, Nobes wondered if the old accounting classifications are still relevant in the “IFRS
era”. In 2010, together with Erlend Kvaal, he performed a study in which the IFRS practices of five
countries were taken into account: Australia, France, Germany, Spain and Great Britain. Analysing
the financial statements for the financial years 2005 and 2006 for the major companies listed in
these countries (a number of 232 financial statements of various fields of activity), Kvaal and Nobes
noted the existence of national practices different from the IFRS ones. Analysing, as well, the
financial statements for the years 2008-2009, the two researchers have noticed the same occurrence.
The 2011 research attempts to investigate whether the classification made in 1983 leading to the
creation of two groups is still valid even after 30 years. Out of the 14 countries included in the
classification, Nobes selected eight (Australia, France, Germany, Spain, the United Kingdom, Italy,
Sweden and Holland). For 287 of the financial statements, 13 criteria were used: six referring to the
presentation practices and seven referring to measurement practices.

Source: Nobes, C., An accounting Classification Based on IFRS Practice, School of Management University of
London, Seminar, 2011, p.24
Figure 4-Accounting system classification (Nobes, 2011)

All statistical techniques have led to the same conclusion: the Anglo and continental
European groups can be identified in the IFRS practices of large companies (Figure 4), the national
accounting practices being resistant to the harmonisation process. Nobes used in his research the
average linkage between groups method, this procedure identifying the congruence in policies
between each pair of countries (Nobes, 2011, p.277). Germany and France form the first pair and
together form a single unit which, together with Italy, form another pair. They, in turn, form another
unit which, coupled with Holland, form another pair. Thus, another unit is formed which, together
with Spain, form another pair. Australia and Great Britain form a pair in the Anglo group.
Although Romania is not part of the study, we can imagine that it would form a pair with
France.

RESULT OF RESEARCH: APPEAL ON THE HISTORICAL APPROACH ON THE


ACCOUNTING SYSTEMS CLASSIFICATION

The financial information of companies from different countries has been and continues to be
the driving forces behind the movement of international accounting harmonisation. Creating an

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accounting system classification can favour the analysis of the international harmonisation process,
irrespective of the realization of this process, “either through mutual recognition, through
convergence between different referential or through standardizing these referential”. (Bogdan,
2005, p.93)
The origin of the differences and the similarities, as far as the financial information content
provided by companies is concerned, is focused on the analysis of accounting systems. As shown
above, most researches on the classification of accounting systems were based on parameters such
as socio-economic environment or on accounting practices, but in the current context of
globalisation, changes occur in both the social and the cultural environment, which greatly
influences the accounting systems. These changes cause an evolution in the accounting systems and
therefore require constant updating.
Without minimizing the efforts made by the researchers until now in the field of international
accounting classification we believe that the contingent approach won at the expense of the
historical approach. The manner of financing remains the most important criterion in the
classification of accounting systems, but in our opinion, one based on the historical (traditional)
character of national accounting regulations, could be a criterion that should be considered in the
future. “Whether out of deep-seated tradition, indifference born of economic power, or resistance to
intrusion of foreign influence, some say that national entities will not bow to any international
body” (Beresford, 1988, pp 79-80). For example, since 2002, FASB and IASB have been working
on the convergence with U.S. GAAP IAS / IFRS. After a ten-year convergence process between
two international referential, in 2015, the US will have to give up on about 100 years of history in
accounting normalisation and apply IFRS.
We consider, in this case, that out of nationalisation and respect for the history of its
regulations, it will be difficult for U.S. companies to abandon the national accounting practices,
which could be an obstacle in the process of harmonization.

CONCLUSION

In 1999, professor Feleagă stated that the national differences persist (Feleagă, 1999, pp. 19-
23), and after 12 years, in 2011, professor Nobes claimed the same. The two groups, Anglo-Saxon
and continental European, still exist which reinforces the idea that “an international accounting
harmonisation … is a delicate enterprise if not an impossible one. It is, at least, a long term
endeavour.”
Accounting classification of accounting systems is not subject to harmonization process,
but between them there is an interdependent relationship in the sense that through classification
positioning of a country to the others would be achieved, thus emphasizing the progress made by it
in comparison to another of the same category. Unfortunately, this classification is easier to achieve
in terms of theory and harder in practice because it is harder to anticipate the responses of the
economic environment. But this does not mean that the importance of research must not be
underestimated. Research in the international classification of accounting and reporting systems is
important because it helps us to better understand the complex realities regarding accounting
practices around the world (Selhorn and Tomaszewski, 2006, pg. 188) and can favour the analysis
of the international harmonisation process, its logic and its challenges.

REFERENCES

1. Alexander, D., Nobes C., (2010), Financial accounting. An International Introduction,


Prentice Hall, London;
2. Aureli, S., Principi contabili internazionali, Facolta di Economia, URBINO;
3. Beresford, D.R., (1988), Accounting for International Operations, CPA Journal;
4. Bogdan, V., (2004) Armonizarea contabilă internaţională, Editura Economică, Bucureşti,
2004;

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5. Buckley, J.W., Buckley, M.H., The accounting profession, Melville, Los Angeles (1974);
6. Choi, F., Meeh, G., (2011), International accounting, Prentice Hall, London;
7. Cigdem, S., Sinan A., (2007), The historical evolution of accounting in China: the effects of
culture, Revista Española de Historia de la Contabilidad, decembrie 2007, p.146-173;
8. Doupnik, T., Perera H., (2007), Contabilidad internacional, McGraw-Hill Interamericana;
9. Feleagă, N., (1999), Sisteme contabile comparate – contabilitățile anglo-saxone, vol.I, ediţia
a II-a, Editura Economică, Bucureşti;
10. Feleagă, N., (2000), Sisteme contabile comparate - Normele contabile internaţionale, vol.II,
ediţia a II-a, Editura Economică, Bucureşti;
11. Gorgan, C., (2013), Convergența contabilă internațională. Implicații asupra raportării
financiare, Editura ASE, București;
12. Gray, S.J., (1988), Towards a Theory of Cultural Influence on the Development of
Accounting Systems Internationally, Abacus;
13. Hofstede, G., Hofstede, G.J., Minkov, M., (2012), Culturi și organizații. Softul mintal.
Cooperarea interculturală și importanța ei pentru supraviețuire, Editura Humanitas,
București,
14. Kvaal, E., Nobes, C., (2010), International differences in IFRS policy choice: a research
note, Accounting and Business Research, Vol.40, No.2, pp.173-187;
15. Morales, F.P., Jarne, J.J.I, (2006), Clasificación Internacional de los de Argentina, Brasil y
Chile Sistemas Contables, Panorama Socioeconomica, anul 24, Nº 32, p. 90-95 (Ianuarie –
Iunie 2006) ;
16. Nair, R.D.,Werner G. F.,(1980), The Impact of Disclosure and Measurement Practices on
International Accounting Classifications, The Accounting Review, Vol. 55, No. 3 (Jul.,
1980), pp. 426-450;
17. Nobes, C., (2011), An accounting Classification Based on IFRS Practice, School of
Management University of London, Seminar;
18. Nobes, C., (2011), IFRS Practices and the Persistence of Accounting System Classification,
Abacus, vol.47,nr.3;
19. Nobes, C., (2011), International Variations in IFRS Adoption and Practice, ACCA;
20. Nobes, C., Parker R., (2008), Comparative International accounting, Prentice Hall;
21. Pântea, I.P., Cristea Ș., (2009), Importanța clasificărilor internaționale în domeniul
raportării financiare în contextul procesului de armonizare contabilă, Revista Audit
Financiar nr.1/2009;
22. Roberts, C., Weetman, P., Gordon, P., (2005), International Financial Accounting. A
Comparative Approach, Prentice Hall;
23. Saita, M., Saracino, P., Provasi, R., Messaggi, S., Evoluzione dei principi contabile nel
contesto internazionale, Franco Angeli, 2012;
24. Selhorn, T., Tomaszewski, S., Implications of the ‘IAS Regulation’ for Research into the
International Differences in Accounting Systems, Accounting in Europe, vol.3, pp. 187-217;
25. Tabără, N., Horomnea, E., Mircea M. C., (2010), Contabilitate Internaţională, Editura
TipoMoldova, Iaşi, , ediţia a 2-a;

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Public Administration 2013

SECTION 4

STATISTICS, ECONOMIC INFORMATICS


AND MATHEMATICS

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Public Administration 2013

INTERNET OF THINGS – SOME ETHICAL ISSUES


Lecturer PhD Daniela POPESCUL
„Alexandru Ioan Cuza” University of Iaşi, Romania
rdaniela@uaic.ro

Professor PhD Mircea GEORGESCU
„Alexandru Ioan Cuza” University of Iaşi, Romania
mirceag@uaic.ro

Abstract:
The purpose of this study is to treat aspects that are related to the sensitivity of data, information and knowledge
transmitted through Internet of Things, helping all people interested in these new ICT technologies to become aware of
some ethical issues. In this new media, which is no more in its infancy, the vulnerabilities and attacks are various,
caused by technological advances and proliferated through lack of users’ awareness. This warning message is needed
because of data, information and knowledge transfer from virtual to physical devices that are connected to wireless
networks of different sizes and importance. The transfer is augmented by the extended use of new technologies as RFID,
NFC, sensors, 3G and 4G and brings along the adjustment of the traditional information security threats to this new
environment, as well as the emergence of new characteristic dangers. The problems treated here are of interest both for
each of us, as individuals, and for the organizations managers – especially in a world in which the borderline between
the physical and virtual life is becoming more and more difficult to draw.

Key words: ICT ethics, Internet of Things, NFC, RFID, sensors

JEL classification: L86, M15

INTRODUCTION

The aspects related to ethics in information and communication technology have been a
subject of study for the academic world and the wide public since the appearance of computers and
the prefiguration of artificial intelligence. Thus, it is said that information and communication
technologies are of an emergent and creative nature (Berthon, Leyland and Watson, 2008), and
explicitly or implicitly they overtake some of our tasks and delicately induce certain moods or even
force certain behavior patterns, following their own development and functioning logic,
imperatively heading to maximum efficiency. Society can only answer to this by adapting and
accepting the situation (Niculescu-Dincă, 2010). Currently, research goes round the so-called green
technologies (Radu, 2012-1, 2012-2, 2013-1), calm technologies (Ţugui, 2011-1, 2011-2), Big Data
(Davis, 2012, Danubianu, Bărîlă, 2013), cloud computing (Ţugui and Şiclovan, 2013), the impact of
socializing networks on people and communities (Fukuyama, 2002, Bard and Söderqvist, 2010,
Man, 2013, Stoica, 2013, Radu, 2013-2, Vătuiu and Udrică, 2013, Jeder, 2013, Maxim and Socaciu,
2013).
One of the contemporary technological accomplishments which raises a great number of
ethical questions is the Internet of Things. In the Internet of Things, the physical things connect to
other physical things, using wireless communication and offering contextual services. According to
Business Insider, which quotes one of Morgan Stanley`s predictions (Danova, 2013), more than 75
billions of objects will be connected to the Internet of Things by 2020. Hence, in 2011, the
European Commissioner, Gerald Santucci, head of Internet of Things and Future Internet Enterprise
Systems Unit from the European Committee underlined the fact that ”The Internet of Things does
not refer only to things, but also to the relationship between the objects which surround the people
daily and the people themselves” and he was wondering: ”What place will the human beings have
in a world in which 7 billions of people live together with 70 billion cars and a few thousand of
billions of objects connected to an infrastructure of global networking, having the ability of self-

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coordination, self-configuring and self-diagnosis?” (Santucci, 2011). Similar questions are asked by
Sarma, Brock and Ashton, 2000, Karimi, 2013, Van den Hoven, 2013 and they are also the topic of
this paper.

INTERNET OF THINGS SPECIFIC TECHNOLOGIES AND CHARACTERISTICS


– DRIVERS OF ETHICAL PROBLEMS

The ethical issues are caused by the expansion on a very large scale of the IoT specific
technologies and characteristics. IoT is based on a global infrastructure network which connects
physical and virtual objects in a unique way, by exploiting the data captured by the sensors, the
equipment used for communication and localization. The RFID technology lies at the basis of this
development, but the concept of Internet of Things has spread by incorporating technologies such as
Near Field Communication, 2D bar codes, wireless sensors, localization technologies, 3 or 4G
communications.
RFID (Radio Frequency Identification) is a technology which uses electromagnetic fields to
automatically identify objects, by labeling them with a chip or two antennae, called „tag”. The tag
sends a unique electronic code which is read by a reader which can be placed anywhere. The tags
are all different and RFID can be used to automatically track objects, including those attached to
people (ski pass, driving license, time tags, bracelets for pupils) and those injected or implanted
within human or animal skin (for medical purposes, but also for the VIP access in certain areas – for
example Baja Beach Club from Barcelona), making an inventory on the spot for all the products in
a warehouse or the shopping basket in a supermarket. Also, tags can be attached to mobile phones
for various reasons, so on.
The sensors included in the connected objects can be of different natures – of proximity,
temperature, ambient light, accelerometers and others. Only a small part of the electronic and
household devices sold nowadays do not include sensors - a smart phone or a tablet, for example, is
equipped with at least 10 sensors. They play a very important role in establishing the relationship
between the virtual world and the parameters of the physical world and they allow the objects to
react to the changes from the environment where they are placed. Some of these sensors are
nanosensors, namely sensors of dimensions of one billionth of a meter. They can be used to
diagnose illnesses such as AIDS, to detect the level of pollution in water, to be attached to robots
which help and save lives in case of disasters and so on. Starting from the abundance of sensors in
contemporary world, we can speak about Remote Emotive Computing (REC) – a technique of
retrieving and processing human emotions with computers based on sensors. An example of REC
use is given by Karimi, 2013, who invites us to imagine an individual who is monitored all the time
by sensors which note all of his actions, feelings and movements. The received data is sent to an
application which gives back answers related to food, life style or … getting involved in a
relationship. In such a case, the car driven by the individual might alert the police if it ”feels” that
the person drank alcohol. According to Wheatley, 2013, Google sent in 2012 a request to patent a
device which receives the environment sounds heard at the same time with a conversation on a
computer microphone or phone so that it could identify exactly what the user is doing and could
make an advertisement highly adapted to the surrounding environment. A similar technology, but
more debatable from the ethical point of view, was accomplished by Verizon who wishes to
integrate active web cameras in TVs, DVRs or phones and monitor the users’ everyday activities.
IoT uses also localization technologies. There are available many devices which can localize a
certain object at a certain moment, the most popular one being GPS. GPS (Global Positioning
Solutions) is a system controlled and financed by the American Department of Defense. GPS uses
satellites to monitor (vertically and horizontally) the position held by a user, his speed and current
timing, depending on the place he is in. It can be used anywhere in the world, including on planes
and ships. The GPS receptors estimate the position according to the satellites which orbit the earth

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at a speed of approximately 3 km/ s. There are visible 5 to 8 satellites from any spot on earth.
Consequently, the accuracy in positioning is quite high, 100 m horizontally and 156 m vertically,
but the error rate is quite small, only a few meters.
NFC (Near Field Communication) is a radio device, on a frequency of 13.56 MHz, which can
establish the communication between two objects which are in an area of up to 20 cm. The data
exchange speed can reach a maximum of 424 kbit/s, and the time to make the connection is smaller
than 1/10 seconds. The possible uses of NFC are contactless payments (by simply approaching the
mobile phone to a special reader), sharing information in social networks, replacing identity cards
or door keys, so on. According to Wikipedia (2013), in Germany, Austria, Finland, New Zeeland,
Italy, Iran and Turkey there have been set up NFC payment devices for public transport networks.
3G is the acronym used for the third generation of mobile phones. The technology used to
transfer voice and data (including videos) allows downloading software, email and instant
messaging communication. 4G is a combination between 3G and WiMax. WiMax (Worldwide
Interoperability for Microwave Access) has a larger coverage area and a wider band than Wi-Fi. 4G
combines the area of great 3G coverage with the WiMax speed, the result being the mobile access
to Ethernet speeds (approximately 10 Mbps), in local networks as well as in large ones.
The combination of these technologies can create science fiction environments in which more
and more activities will be accomplished unrelated to the objects surrounding us, being capable to
communicate and this gives the possibility to make new businesses, inconceivable today. The
services offered by technology might be adapted depending on the actions done by the individual,
the device, the infrastructure or nature at that particular moment. Other potential uses of the
Internet of Things are those related to households, smart cities and health monitoring devices.
Taking into consideration these aspects, a report from the European Commission made by Van den
Hoven, 2013, in the context of the Digital Agenda for Europe mentions the characteristics of the
Internet of Things (IoT) which might cause ethical problems:
• Ubiquity, omnipresence – the user is attracted to IoT, devoured by it, there is no clear way
out, a way to give up using the artifacts (which will no longer be possible at some point, due to the
producers which will equip them with Internet connection devices);
• Miniaturization, invisibility – computers, as they are nowadays, will disappear – the devices
will be smaller and smaller, transparent, thus avoiding any inspections, audit, quality control and
accounting procedures;
• Ambiguity – the distinction between the natural objects, artifacts and beings will be more
and more difficult to be made as a consequence of the easy transformation from one category into
another based on tags, advanced design and absorption in new networks of artifacts. There will
appear serious problems of identity and system boundaries;
• Difficult identification – in order to be connected to the IoT, the objects will have an
identity. The access to these „armies” of objects, the management of these identities might raise
great interest and cause serious problems of security and control in a globalized world;
• Ultra-connectivity – the connections will increase in number and reach unprecedented scales
of objects and people. Consequently, the quantities of transferred data and products will increase
greatly (Big Data), and they could be maliciously used;
• Autonomous and unpredictable behavior – the interconnected objects might interfere
spontaneously in human events, in unexpected ways for the users or the designers. The people will
be part of the IoT environments together with artifacts and devices, thus creating hybrid systems
with unexpected behavior. The incremental development of IoT will lead to emerging behaviors
without the users fully understanding the environment they are exposed to;
• Incorporated intelligence, which makes the objects be seen as substitutes for the social life –
the objects will be intelligent and dynamic, with an emerging behavior; they will be extensions (not
only external) of the human mind and body. Being deprived of these devices will lead to problems –
see the teenagers who consider themselves cognitively or socially handicapped without Google, a

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smart phone or social media;


• Difficult control – the IoT control and governance will not be centralized, as a consequence
of the great number of hubs, switches and data. The information flows will be eased; the transfers
will be quicker and cheaper, not easy to be controlled. There will appear emerging properties and
phenomena which will require monitoring and governance in an adequate way and this will further
influence the accountancy and control activities.

ETHICAL CHALLENGES IN IOT

Ethics in the TIC field refers to the use according to the social behaviour standards. The
majority of ethical debates appear around property, accessibility, acuracy and private use of
information. According to authors Valacich and Schneider (2010, p. 484), an ethical behaviour
requires:
• enforce the property rights on information;
• ensure the access to information;
• ensure the integrity of the information;
• enforce the right to private life.

Figure 1 – Central ICT ethics issues – accesibility, privacy, property and integrity of
information
Source: Valacich, J., Schneider, C., Information Systems Today. Managing in the Digital World, 4th Edition, Pearson
Publishing House, Boston, 2010, p. 484

The impact of technologies and the characteristics mentioned above on the four features of the
ethical behaviour are presented in figure 2.

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Figure 2 – The impact of IoT technologies and characteristics on the ethical behavior

A few of the ethical issues which derive from these characteristics are discussed in the
following part.
As regards the property right on data and information, the difficulties will appear from the
correct identification of the authors – for example, an answer to the question ”Who is the owner of
the data retrieved by the sensors of the objects connected to the Internet of Things?” is hard to
imagine at this point. When the information is personal or financial data, things get more serious.
The IoT omnipresence will make the boundaries between the public and private space be invisible,
and people will not know where their information ends up. The Big Brother type surveillance,
namely monitoring the individuals without them being aware of it will be possible. The objects will
be equipped with sensors which will allow them to ”see”, ”hear” or even ”smell”. The data
registered by the sensors will be sent in great quantities and in different ways through networks,
which will bring prejudice to the individual private life. By means of RFID, GPS and NFC
technologies, the geographic place where a person is and his movements from one place to another
can be easily found without his knowledge. The information collected from a chip implanted with
the person’s consent (for medical purposes) might be maliciously used. There might be also created
individual profiles depending on their consumption habits and evil outsiders might make decisions
related to them.
Related to accessibility of information, if a contemporary attack on a PC might cause
information loss or spreading, a virus or hacker attack in IoT might have a direct influence on
people’s lives. For example, interfering in the control system of a car connected to IoT might
endanger the life of the passengers – this type of attacks have already been proven as possible (for
example, the hackers could interfere on the on-board computer by an MP3 players). Recent news
from Sky News, 2013 mention sales on the black market of the computer worm called Stuxnet and
the experts in IT security say that it could be used to attack any physical target which is related to
computers. The list of vulnerable systems is almost endless – it includes the electric heating
systems, food distribution networks, hospitals, traffic lights systems, transport networks and even
weirs. The attack scenarios which might be envisaged starting from here are scaring.
The digital divide will increase in the Internet of Things, as it will be understood only by
experts. It is debatable whether there is possible a fair distribution of benefits and costs as well as
the real presence of equal opportunities in accessing the IoT advantages. Moreover, the
communication from one device to another will influence people’s lives in ways which are hard to
imagine as long as there will not be a coherent, legal and democratic frame to delineate the limits of

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this process.

CONCLUSIONS

Even in the context of the non-exhaustive overview of the above presented dangers, we
believe that the Internet of Things represents, if incorrectly managed, a danger from the perspective
of ethics for the contemporary individuals and organizations. Every individual needs to be ensured
that he/she will be protected by effective technical solutions, re-interpreted and updated for IoT (as,
for example, encryption techniques, ID management, privacy enhancing technologies, digital
watermarking, electronic signature etc..), legal/regulatory mechanisms (consumers consent,
legislation limiting the data collected and used by third parties, accountability of transactions
mediated by IO etc.), economical measures (self-regulation, codes of conduct, consumer education,
privacy certification) and social ones (public awareness, disclosure, public advocacy, consumer
rights). After these first steps of awareness, further research must be done methodically on
interventions needed to prevent the turning of IoT into a feared and intrusive Big Brother.

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agenda/en/news/conclusions-internet-things-public-consultation, 28.02.2013, accessed at
2.09.2013.
24. Vătuiu, T., Udrică, M. (2013), Virtual learning environment as part of lifelong learning,
Proceedings of the International Conference SMART 2013 - Social Media in Academia:
Research and Teaching, June 6-9, Bacau, Romania (edited by Bogdan Patrut), Medimond -
Monduzzi Editore International Proceedings Division, Bologna, Italy, pp. 123-128.
25. Wheatley, M. (2013), Big Brother’s Big Data: Why We Must Fear The Internet Of Things?,
http://siliconangle.com/blog/2013/01/10/big-brothers-big-data-why-we-must-fear-the-internet-
of-things/, 10.01.2013, accessed at 14.09.2013.

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of Economics and Issue 2(18),
Public Administration 2013

AUGMENTED REALITY - STATE OF KNOWLEDGE, USE AND


EXPERIMENTATION
Lecturer PhD Mihaela Filofteia TUTUNEA
Universitatea Babeș‐Bolyai Cluj‐Napoca
Lecturer PhD, Facultatea de Business
mihaela.tutunea@tbs.ubbcluj.ro

Abstract:
Technologies for augmenting reality have been consolidated during the last decades, extending their
applicability to more and more socio-economic areas. The rapid evolution of mobile technologies and virtualization of
the digital environment have created auspicious conditions for massive extension and implementation of solutions for
augmenting reality at global level. Experience has already shown that augmented reality, alongside virtual reality can
offer very important support solutions in modeling the real world with the aim of extending the human capabilities of
perception, allowing the opening of a new phase in the world’s socio-economic development. Starting from the evident
tendencies that have manifested at global level in the development and implementation of augmented reality
technologies, the paper begins with the presentation of the most important aspects related to augmented reality
technologies, highlighting their main areas of application, and presents the study realized for identifying the level of
knowledge, use and effective experimentation of augmented reality applications by mobile device users. The results of
this study could be very useful to the socio-economic environment, starting with the field of research, continuing with
developers and providers of augmented reality solutions, manufacturers and providers of hardware infrastructure
support for augmented reality solutions and systems, final users of these solutions, both individuals and businesses, and
experimenting digital communities.

Key words: augmented reality (AR), virtual reality (VR), mobile devices, mobile operating systems

JEL classification: C88, L86, M15

INTRODUCTION

Informational globalization and digital economy has brought important changes at


individual level, as well as corporate level; the development of technologies and the amplification
of access to them generated quick transformations at the level of human perception, developing
new needs and individual capabilities for experimenting.
The last decade, through the globalization of the digital business environment has
generated new individual habits regarding needs for consumption, accepted forms of presentation
and purchasing of products in the digital environment, thus establishing a level of digital
saturation which can already be integrated to the traditional category; exceeding this level was
triggered and based especially on the extension of human capacity of perceiving the reality,
helped by an adequate technological infrastructure. From this perspective, at global level, the 60s
launched a new challenge opening a new way, that of augmented reality (AR), and
incommensurable possibilities for using its applications in all the areas of socio-economic
activity.
Since then, augmented reality had consolidated as technology, incorporating complex
applications and systems in more and more fields of the global economy; the rapid evolution of
mobile devices and the virtualization of the digital environment have prepared an auspicious
environment for massive implementation of AR solutions at global level.
In this context, augmented reality, alongside virtual reality can offer very important
support solutions in modeling the real world with the aim of extending the human capabilities of
perception, allowing the opening of a new phase in the world’s socio-economic development.
Starting from considerations related to evident tendencies that have manifested at global
level in the development and implementation of AR technologies as support systems in all the
fields of human and economic activity, the present study briefly presents the most important

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aspects related to AR technologies, highlighting their main areas of application, and presents the
research carried out with the aim of identifying the level of knowledge, experimentation and
employment of AR applications by mobile device users.
Given the goals of this study, relevant aspects had been taken into account when choosing
the population participating in the research, considering that experimenting AR solutions supposes
the followings:
 the existence of an adequate hardware, software and communication infrastructure, based
mainly on mobile devices and technologies - it was required to identify individuals
having at disposal this kind of infrastructure;
 Use of digital environment as general platform - the population of the research had to
consist of users of the digital environment, having consolidated ICT competencies, and
used to downloading and installing desktop and mobile applications.
Other considerations taken into account in selecting the studied population were based on the
fact that any software solution or application:
 regardless the platform or the field of activity for which it was developed, is launched
and amply debated in the digital environment; digital communities of developers and of
users are those who influence the trajectory of these applications; it is evident that
knowledge of and experimentation of these AR solutions imply the same path; as a
consequence, participants in the research had to be members of collaborative
communities specific to the digital environment;
 is launched on a global market and for the use of a universalized diversity of potential or
final consumers; as a result, participants in the research had to respect these proportions
and come from all over the world, regardless the country of origin or residence.
The results of the present study are useful for the actors of the socio-economic environment,
starting with the field of research, continuing with developers and providers of such solutions,
manufacturers and providers of hardware support infrastructure for augmented reality solutions and
systems, final users, either individuals or corporations, and experimenting digital communities.

LITERATURE REVIEW

1. About Augmented Reality


It is said that Augmented Reality has a history as long as the field of computer graphics; its
beginnings were laid in 1956 by Morton Heilig, considered to be the father of virtual reality (VR)
who started designing his first virtual multi-sensorial experiences (sensorama machine) [15].
Augmented reality, as term, was introduced only in 1992 and referred to overlaying
computer-produced representations on top of the real world. Tom Caudell and David Mizell,
brought into discussion the advantages of augmented reality in comparison to those of virtual reality
seen from the perspective of lower needs for computational power and multimedia processing [21].
Augmented reality, in the specialized literature has got several definitions. It defines the
timely integration of digital information with multimedia elements taken from the user’s
environment [11].
From another perspective, AR appears as real time display, visualization of several layers of
information taken from the AR user’s environment having diverse digital representation forms, from
text to image and multimedia [12].
According to another definition, AR appears as a field of virtual reality (VR) in ample
development, through which composite systems are generated combining scenes captured from the
user’s real environment with additional sets of digital, multimedia information generated by
computer and overlaid, thus generating the augmented reality [18].
From the same perspective of including augmented reality into virtual reality, AR is defined
as a variation of the VR concept; but the two concepts are differentiated; while VR comprises
technologies that completely integrate the user in an artificial environment, disconnected from the
real environment, in AR the user has access to the real world through overlaid multimedia interfaces

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that are complementing it (Azuma, 1997). The same author points out that, though some authors
associate AR with the use of HMD (head-mounted display) devices, it should not be reduced only to
these aspects; according to the study carried out by the author, augmented reality is a system
combining real environment with the virtual one using 3D recordings and having real time
interactivity (Azuma, 1997).
Augmented reality is also defined as artificial environment through which the real
environment is complemented in real time with virtual elements with the aim of improving innate
human abilities; AR thus creates interactive systems that combine elements of the whole real
environment and use diverse support devices for combining layers and types of processed
information (mobile devices, head-mounted display, tracking system, visual display piece, desktop,
projectors, etc.) [6].
New Media Consortium, in “The Horizon Report” published in 2011 refers to AR as a
superior level of representation of the real world through superposing information over images
using specific devices (computers, mobile terminals, multi- and hypermedia, etc.) providing the
final users more intuitive access possibilities [16].
Taking into account the most important type under which augmented reality is known,
several interpretations are indicated; depending on the implementation modality of AR two types
are identified, namely: marker-based and marker less. Marker-based AR implementations are used
by a starting image that triggers an action when read and recognized by a digital device (photo
camera, mobile device, etc.); presently, it is the most used AR type. Marker less augmented reality
is more complex, extending the capabilities of a digital device with location-based functionalities
(for example GPS localization); for this reason in the specialized practice this type of augmented
reality is also mentioned as location-based or position-based AR; this type is more difficult to
develop because of the technological limitations of the infrastructure elements on which it is based
and combines (i.e. accuracy of geo-locations on GPS devices, bandwidths, respectively connection
and transfer speed of technical support for communication, etc.) [10].
(Rabbi and Ullah, 2013: p 33-34) identified a set of important challenges in the field of
development of augmented reality, for example: performance of AR experiments, the closest
alignment of these with the real world, mobility and portability of AR and achieving a visualization
in these systems, so that differences in display of AR objects compared to real ones to be
imperceptible for the user.
(Behrang Parhizkar et al., 2011) provide a classification of AR applications enforcing three
important categories, namely desktop, mobile and web-based. In the web-based applications
category specific applications from the field of education, medicine, marketing and game-industry
are enumerated. In their study, the authors considered as parameters for comparing AR applications
the following: quality, simplicity, availability and efficiency. In the field of education the following
systems are identified as web-based applications: MARIE (multimedia augmented reality interface
for e-learning), Scimorph (AR application for children) and LearnAR (AR application for e-
learning). In case of medicine, AR systems for surgery, study of anatomy and medical training were
identified.

2. Current fields of application of AR


Augmented reality applications have penetrated all the fields of activity having known an
impressive development during the last decade, respectively an increment in types and numbers of
employment modalities for which these applications are designed. The specialized literature has
carried out a series of classifications of AR technologies, applications and emblems, including the
fields of activities for which they have been designed. A study carried out by (Nur Intan Adhani and
Dayang Rohaya Awang Rambli, 2012) includes among the most important fields of activity served by
mobile AR applications the followings: sports, games, entertainment, medicine and health care,
cultural heritage, education, marketing, media. The authors also made a ranking of AR devices used by
these applications, resulting that the most used ones were the handheld devices, followed at great
length by projectors and HMD (head-mounted display) devices.

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Medicine
(Khawla Ben Abderrahim et al., 2013, p: 26-27) identified a list of AR systems used in
medicine, including Vein viewer (Computerized image projection system of patient’s veins using
infrared light), CASPER (support system for carrying out punctures), Tedesys (3D imaging support
system for surgery), CAMDASS (Computer Medical Diagnosis and Surgery System), Exakis
(support system in physiotherapy).
Military sciences
(Le Roux Willem, 2010) presented a series of examples of possible AR applications as
support for the most important commanding and control functions specific to a Joint Operation
Centre; based on these functions the author referred some augmented reality applications as:
sandbox with AR, visualization of specific information based on the positioning and geo-located
orientation using AR specific devices, use of AR in simulating sequences of events, use of AR
devices as support in training and exercises specific to special operations.
E-commerce
(Li Xiao-J et al., 2013, p:1135-1136), from the perspective of online sales, e-commerce and
traditional bi-dimensional form of presentation of products identifies an online product display
system using augmented reality technologies. The authors defined both compulsory and optional
elements for the interface level of the proposed system; among compulsory elements at this level
they also include the AR type interface; at service function level they also integrate augmented
reality modules including both marker-based and marker less AR.
(Canavilhas João, 2013), starting from the generalization of using mobile devices, points
out the importance of using augmented reality in the media industry and the new opportunities and
forms of presentation and communication of information that AR can provide.
Education
(Specht Marcus et al., 2011) specified the fact that mobile AR systems may be applied in
numerous educational fields; the authors integrate mobile AR applications in a matrix of
educational models based on educational objectives and contextual information; starting from the
educational objectives and identifying aspects linked to the implementation and context, the authors
highlight among the dynamically usable AR elements 3D Objects, augmented books, Sensor-Based
Layers.
(Kesim Mehmet and Ozarslan Yasin, 2012) explore modern technologies that may be used
in the field of education, identifying new tendencies in the employment of augmented reality in this
field; after highlighting technologies specific to AR systems, presenting pinch and data gloves,
head-mounted and handheld displays, the authors point out that AR has a huge potential for being
effectively used in learning, entertainment and edutainment, the most important advantages being
linked to increasing users’ perception and real time interaction with their surrounding environment.
Design and manufacturing
(Nee et al., 2012) identified systems in the field of design and manufacturing, the most
important areas of AR research, also offering a classification of the main virtual reality and
augmented reality systems used. Concerning AR systems, the authors list AR-based design systems
including collaborative and distributed design systems and visualization-based AR systems, as well
as AR systems used in robotics. AR applications in industry are also presented, starting with the
Boeing project in the 90s and continuing with multiple applications in the automotive and aircraft
construction industries, the authors also suggesting the ubiquity of AR solutions in industry.
AR games
(João Jacob et al., 2012), demonstrating the applicability of augmented reality in the game
industry, presented a solution based on using OpenGL ES 1.1i and the Android SDK (software
development kit)ii for developing a multiplayer type action game belonging to the location-based
mobile AR category.
Social networks

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(De Chiara et al.,2011), starting from the globalization of using social networks on mobile
devices, made a prototype of a mobile AR system similar to social networks enriched with specific
augmented reality technologies.
Tourism
Augmented reality applications relying on location-based services make possible an
extension of the functionalities offered by mobile social networks and mobile applications for
tourism; these allow, with the help of AR technologies, identifying some points of interest for the
members of the social network regarding places for serving dinner in a geo-localized area based on
maximum distances and user’s coordinates (Farhat et al., 2013).
A considerable number of mobile AR applications have been developed for tourism, being
evidently dependent on the operating systems of mobile devices used in AR technologies, and many
of the applications, even those of geo-location; such perspectives on AR applications for tourism
depending on location and mobile operating systems on which they operate, bring into the forefront
the availability of a great number of applications for iOS (Tuscany+, Basel AR Tourist Guide (also
available for Android, Symbian and BlackBerry OS), Street Museum London (also available for
Android OS)) (Kounavis et al., 2012).
Agriculture
One of the AR applications for agriculture may be described as a guidance system for large
agricultural equipment (e.g. tractor) and can be regarded as a complex system of hardware, software
and AR technologies; it uses specific data collected by sensors that, after being processed, are
offered as viewable results in 3D format on AR (eye monitor glasses) (Santana-Fernández et al.,
2010).

3. Augmented reality – statistical overview


A visualization of the evolution of interest manifested in the online environment for
augmented reality (AR), performed using Google trends indicates, at global level, for the period
starting with 2004 up to present, a significant increase marked especially on the temporal segment
September 2008 – October 2009; in April 2012 the interest manifested for AR was at its maximum,
after that until now there has been a decreasing tendency of the manifested interest.
According to the same analysis, the most used terms in searches connected to augmented
reality are: AR iPhone, AR android, AR apps, Google glasses, AR mobile, AR game; these searches
are initiated by Internet users from USE, Canada, Western Europe, India, Indonesia, Australia.
Taking into account the number of accesses on this subject, most of the users come from the
following cities: Singapore, Bangalore, Munich, Los Angeles, New York, Toronto, London,
Amsterdam, Jakarta, Sydney.
At the level of year 2011, according to researches carried out, a very low percentage of only
0.1% of AR technology users was reported, but it is estimated that an increased percentage of 1% of
the population to become users of these applications by 2016, applications which will register an
exponential increase on the specialized market [14]. According to the same source, the AR
applications’ market will have an increase of revenues from $181.25 million in 2011 to $5,155.92
million in 2016. The most important providers of AR solutions were determined as: Total
Immersion (France), Metaio (Germany), Wikitude (Austria), Zugara (USA), and Layar (The
Netherlands).
Juniper Research, in its report points out that by 2017 more than 2.5 billion mobile AR
applications will be downloaded yearly to smartphones and tablets [13].
From the perspective of the aim of use, online researches indicate that 19% of users use augmented
reality as an alternative for written literature, 16% use AR applications at conferences, the same
percentage of users use AR in online publicity campaigns, while 8% uses these solutions for
improving sales of own products [8].
Romania has not been left outside the new trends in augmented reality; in 2012 the company
ARworks, developer of smartphone and tablet applications, provided a free AR application for

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mobile devices using Android and iOS operating systems, allowing to make video clips with AR
technologies [17].
At global level, it is estimated that by 2015 AR technologies will generate a revenue
surpassing 1.5billion dollars. At the same scale, the number of smartphones that support AR
technologies is in continuous increase, at present representing over 40% of the held mobile phones.
In Romania, there are approximately 2.5–2.6 million actively used intelligent terminals allowing
AR applications [20].

RESEARCH METHODOLOGY

a. Problem formulation
Starting from the very large and varied palette of AR applications and the fields where these
are used, and considering these solutions as generators of a very rich offer on a growing market, it is
very useful to identify the level of demand for these products, considered both from individual and
business perspective.
From this perspective, the present research, limited only to the individual aspect of the
demand for AR applications, identified, on one hand, the level of knowledge related to augmented
reality and existing applications, on the other hand, the types of users of these solutions.
b. Choosing the sources of information
This type of study required using a set of information sources formed by primary
information resulting from a questionnaire-based survey and secondary information resulting from
statistical data and from offline and online documentary research.
c. Defining the Sampling Frame
From the perspective of identifying the potential demand for AR products, the research was
aimed to individual users, physical persons, owners of mobile devices with mobile Internet
connection, which was imposed as minimal hardware and communication infrastructure
requirement for experimenting and using these products.
d. Data Collection
The questionnaire was developed in web-format, respectively mobile-based; in carrying out
the study we used the potential of web and mobile social networks from another perspective, that of
extremely useful and much used research tool. Given the topic of the study, for facilitating access to
the web location hosting the questionnaire, QR (quick-response) codes was generated and used.
e. Elaborating the questionnaire
Taking into account aspects related to globalization of social networks, the topic of this
study and the fact that the use of mobile devices and of specific applications suppose a higher level
of education and ICT competencies, the necessity of placing the questionnaire in several linguistic
versions was established; this decision aimed acquiring a more diverse structure in nationalities
present on the social networks.
The questionnaire was conceived in a modular structure consisting of 14 questions,
articulated as follows:
 The first module referred to data about the respondents - age, gender, education, country
of origin and of residence, the environment they live in (urban, rural) and their field of
activity;
 The second module comprised questions regarding the use of mobile devices (mobile
phone, smartphone, tablet, laptop, iPad, e-book reader) and of mobile Internet
connection, respectively identification of operating systems used on these mobile
devices;
 The third module had the aim to identify the users’ levels of knowledge regarding
augmented and virtual reality, respectively the temporal horizon of acquiring this
knowledge;
 The last module identified the types of AR applications experimented or used and the
frequency of deploying these activities.

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f. The Sample
Based on the aims of the research, users of mobile devices were targeted, who were present
on web and mobile social networks and who completed the questionnaire.
It has to be mentioned that, in order the carry out the sampling, it was necessary to consult
statistical data regarding the profile of mobile device users, on one hand, and the web and mobile
social networks and the profile of their users, on the other hand.
In this context, statistics referring to the most used web and mobile social networks, i.e.
Facebook, Twitter, Google+, LinkedIn, point out that the first places in the ranking of the user
countries were held by: USA, India, Brazil, Indonesia, Mexico [19]. According to the same source,
Romania is situated only on the 56th place in the world. Regarding the gender repartition of
Romanian users, the same source indicates an equal proportion of women and men present on social
networks on the web. Taking into account the repartition by age groups of Romanian users the
biggest category is that of users aged 25–36, followed by users aged 18–24.
Regarding the users of mobile social networks, statistical studies indicate a user profile
characterized by the following: the most active are women aged 18-29(67%), having a college
degree and an income above average [9].
g. Methods used
As it was specified previously, social networks like Facebook, LinkedIn, Google+ and
Twitter were used with the aim of presenting and launching the research, and for contacting
potential respondents to the survey. A special topic was created on each of the four social networks
in order to carry out the research; information on the way the study would be conducted, the
invitation to participate in the survey, respectively the request to recommend the survey to their own
network of friends were placed on them.
It has to be mentioned that, as a result of the study, we noticed the huge potential of these
social networks, that can be considered globalised collaborative tools, in supporting the
implementation of this type of studies; using this tool during the entire period of the research
resulted in 1178 subscribers to the topic of the research, that also constituted the researched
population, involved integrally in the survey. When closing down the survey period, 827
questionnaires were completed from which 801 were retained as valid. In our opinion an extremely
important aspect should be mentioned in relation to the response rate (70.20%), that may be
considered a very high one and its value cam be explained by the fact that, within the social
networks the most important part of subscribers became also respondent.

RESEARCH RESULTS

The analysis of data resulted from the questions of the questionnaire’s first module allows
the socio-demographic identification of the subjects. Results indicate a very close proportion of
women (49.61%) and men (50.39%) in the structure of respondents. Regarding the age categories
respondents belong to, at the extremes we have the category of those aged 35-44 as the best
represented category (28.13%) and the category of those aged over 65 with the lowest
representation (3.12%); we must also remark the close percentage of age categories 18-24 (18.93%)
and 45-54 (19.98%).
The respondents’ education level puts at the top the category of university studies (39.12%),
followed by college graduates (28.17%), while basic studies have a very poor representation
(6.67%).
It has to be mentioned the obvious relationship between the best represented age categories
and the respondents’ level of education.
Respondents having the origins in Romania (76.12%) and those who are residents in our
country (59.62%) represent the majority of respondents. The respondents coming from other
countries, with a percentage of 23.88%,have the following structure: Italy (12.34%), France
(12.11%) and Spain (11.92) are the best represented countries; at the other end having placed
Finland (0.56%); with percentages between 5-10% there are, in decreasing order of their

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representation, countries like USA, Germany, Greece, Rep. Moldavia, Great Britain. The segment
of residents in other countries than Romania is also well represented (40.38%), evidently including
non-residents born in Romania and in other countries (figure no. 1).
Regarding the environment in which respondents live, we have an overwhelming majority of
respondents from urban environment (90.56%). It should be noted the fact that all those who
indicated Romanian residence fit into this category; this aspect may indicate the fact that in our
country online and mobile communication media, even if we consider only communication
networks, it is not sufficiently used in rural environment, while in other countries this barrier does
not exist.
This aspect can be explained in Romania by the lack of adequate infrastructure, on one hand,
while, on the other hand, through the insufficiency of instruction and lower level of ICT
competencies of Romanians residing in rural environment.
Finland 0.56%
Lebanon 1.23%
Netherlands 1.27%
Pakistan 1.45%
Austria 1.56%
Russia 1.67%
Sweden 1.67%
Bulgaria 1.87%
Poland 2.02%
Japan 2.15%
Portugal 2.23%
India 2.86%
Cyprus 3.12%
Turkey 3.8%
Great Britain 5.34%
Rep. Moldavia 5.76%
Greece 7.67%
Germany 8.13%
USA 9.23%
Spain 11.92%
France 12.11%
Italy 12.34%
0.00% 5.00% 10.00% 15.00%

Figure 1. The structure of the population according to their country of origin

The fields of occupation indicated by the respondents put at the top of the ranking, with more
than 8%, the following fields: sales, commercial activities (15.23%), production, manufacturing,
engineering, construction (14.23%), ICT, development (8.98%), environmental services (8.38%),
tourism, services, entertainment (8.56%) and business services, real estate (8.34%).
In case of Romanian resident respondents, the fields of occupation are structured in a
different way in comparison to the entire population of the research; thus, the main fields
represented in this case (with percentages over 8%) are: business services, real estate (17.34%),
ICT, development (12.76%), sales, commercial activities (12.11%), education (11.67%), production,
manufacturing, engineering, construction (11.32%), student (10.34%), research, academic (8.12%).
For the questions of the second module the analysis of data resulted from the survey
identified the types of devices and the operating systems used by the respondents, respectively the
availability of a mobile Internet connection. It must be mentioned that we took into account the use
of mobile devices and not their possession by the respondents, based on the fact that many
professionals get these devices for business purposes from their employers and, as a consequence,
they do not purchase another device, as a duplicate. Another aspect that should be highlighted is that
related to the differentiation in the list of mobile devices of mobile phones from smartphones; this
differentiation was made due to the configuration characteristics required for installing and using
AR applications, requiring a specific configuration available mainly in case of smartphones.
A surprising aspect is represented by the existence of a small percentage of respondents who
do not use mobile phones (0.76%), while the rest of 98.24% use one. Based on the percentage of
using one from the listed mobile devices, except for mobile phones, the most used are: laptop
(69.89%) and smartphone (65.23%), while the less used (below 30%) are: iPad, tablet and e-book
reader.
In case of Romanian residents, a different structure is observable in the use of mobile
devices in comparison to the whole population of the study. The first aspect to be highlight is related

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to the percentage of mobile phone users, that is 100%; then, though all the categories, except for e-
book readers (16.20%) obtained higher percentages than those of the entire population, the ranking
of the mobile devices used is the same; thus, laptop (79.20%) and smartphone (68.59%) remain on
the first places, followed by iPad (32.34%) and tablet (26.12%); moreover, for this segment of
respondents a singular tendency is revealed, namely that an important percentage (38.57%) points
out the use of all the indicated mobile devices, while only 32.12% uses all the devices from the list,
except iPad and e-book reader.
The identification of the operating systems used on the mobile devices reveals iOS as the
most used operating system (38.12%), followed by Android(23.34%), BlackBerry (13.12%) and
Windows phone (10.11%), while other operating systems (as JavaMe, Bada, Kindle, etc.), except
those indicated in the list, are used by 3.65% of the respondents.
Again, the results for the Romanian residents’ segment are different from that of the studied
population. Android OS (45.23%) leads the ranking, followed by BlackBerry OS (18.15%) and iOS
(18.12%) in almost equal proportions, followed by Windows phone (10.11%); the rest having
percentages lower than 5%.
Global statistics indicate at the top of the most used operating systems for mobile devices:
Android, iOS, Series 40, Symbian and, according to the same statistics, Romania respects the same
tendencies [7] ; but the results of the analysis for this topic highlight a slightly different situation at
the level of the population, as well as at the level of Romanian residents, in comparison to global
statistics.
Data analysis regarding mobile Internet connection at the level of the entire studied
population indicates a percentage of 85.12% of the respondents having this type of connection,
while in the Romanian segment this percentage is 68.12%.
For the third module of the questionnaire, that is, together with the last module, the most
relevant for the present research, analysis of the data offers important information on the
respondents’ level of knowledge regarding augmented reality, virtual reality and the length in time
of acquiring this knowledge.
A specification has to be made concerning the launch of the two questions related both to
virtual reality and augmented reality. Starting from the fact that virtualization is a concept that has
already become common in the daily language, we aimed to identify the actual level of knowledge
related to the two concepts, as well as the correct differentiation between the concepts, so that to
further corroborate these knowledge with the effective use of AR applications.
The respondents’ level of knowledge about AR and VR reflected in comparison indicates a
significantly higher percentage for low level knowledge on AR (55.76%) in comparison to VR
(38.54%). In case of very high level of knowledge, the percentages have the same tendency, though
in both cases are very low. For these two items we must note an important aspect, namely that this
tendencies manifest both at the level of the entire studied population, and that of Romanian
residents’ segment, for which some particularities were previously identified (table no. 1).

Table 1 - Comparative level of knowledge on AR and VR


Level of knowledge AR VR
Very High 1.12% 2.23%
High 11.56% 10.45%
Medium 19.56% 36.78%
Low 12.00% 12.00%
Very Low 55.76% 38.54%
Indicating the temporal level of acquiring knowledge related to augmented reality, brings to
forefront an important percentage (35.13%) of respondents who do not know anything about this
subject, while the percentage of those who have knowledge about AR for more than three years is
only 10.23%; the segment of those who have recently acquired knowledge on AR (less than a year)
is the highest (32.52%).

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The last module had the aim of identifying the level of experimentation or of use of the main
types of AR applications and the frequency of their employment. The results of data analysis
highlight among the most used categories AR games, entertainment (26.12%), followed by location-
based services (23.34%), AR browser (Layar, Junaio, Wikitude, etc.) (22.12%); among the less
used, with percentages below 5%, we find medical, health systems, AR-books, advertising, media
and other solutions (figure no. 2). Analysis of data regarding the frequency of using augmented
reality applications highlight two classes of respondents, diametrically opposed as action, namely:
non-users of AR, the most important segment (32.78%), who have never heard of these applications,
and the experimenting users, even passionate (18.23%) who try out any new AR application.
With close percentages, two intermediate categories of users can be identified, those who
know about AR applications but they have never tried them, passive users (24.87%) and those who
tried out the AR solutions once, curious users (24.12%).
Others 4.12%

AR-books 4.23%

Advertising , media 4.56%

Teaching, Education 16.33%

Arts 18.12%
AR products design, prototyping,
simulation
19.12%

AR Apps 19.12%

Tourism, travel 19.76%

Browser AR 22.12%

Location based services 23.34%

AR games, entertainment 26.12%

Figure 2. AR applications used

CONCLUSIONS

The study has initiated a topic for further reflection on the level of knowledge, actual
experimentation and use of augmented reality applications at the level of a population well
familiarized with the digital environment and its globalised forms of communication, as well as with
using mobile hardware and software infrastructure.
The results obtained from the analysis of survey data allow the identification of a profile of
the potential or actual user of augmented reality applications; the general profile specific to the
studied population identifies the user as being a male age 35 – 44 with a university degree, who
lives in urban environment, works the fields of sales, commercial activities or production,
manufacturing, engineering, construction, uses a laptop and a smartphone, respectively a mobile
Internet connection; for the mobile devices uses as operating system iOS and Android; has a very
low level of knowledge related to augmented reality, doesn’t know anything about these
technologies and has never experimented them or used them. In case of Romanian residents, the
changes in this profile concern the fields of activity: business services, real estate or ICT,
development.
For the research environment and the AR solution developers, the results of this study reveal
a contradictory aspect, namely: though the specialized literature offers a series of very
comprehensive studies attesting the level of knowledge and use of these technologies, the level of
individual awareness in the globalised environment of the Internet is extremely low; from this
perspective an increased publicity would be very useful, augmented and carried out with AR tools,
applications and technologies using the most important globalized communication medium, the
digital one. The existence of an already high number of AR applications and systems serving
diverse fields of activity, but that are not known, experimented and used, demonstrate a very weak
dissemination at global level of the information related to this topic.

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AR solutions developers and providers, using the results of the study can identify an
important market segment completely unaware about the existence and utility of these solutions and
that could be transformed in a potential or actual user segment of AR solutions if they choose to
develop promotion strategies in the digital environment, using web and mobile social networks for
disseminating information and AR applications.
Manufacturers and providers of hardware infrastructure support for augmented reality
solutions and systems can identify, from the results of the research, new opportunities; on one hand,
they can elaborate development strategies of new products, adapted to augmented reality
technologies and applications, on the other hand, identify an important segment of individual and
corporate demand for infrastructure products required for using AR.
From the results of the research, experimenting digital communities can identify and attract
new members, thus generating an implicit increase of the experimenting or actual users’ segment of
augmented reality solutions, playing a promotional role for these technologies at global level.
Not in the least, participants in this research were initiated in a field, mainly unknown and
non-experimented by them. Using the digital environment and mobile and web social networks, a
new horizon towards experimenting new technologies and identifying new forms and fields for
using them was opened to them.
It becomes evident also in this case, that good information on and knowledge of new
technologies and their use in a variety of fields of activities, respectively substantiation of the
decision on experimenting, adopting and using them represent important advantages in the global
socio-economic development.
The present study can be considered as unique in the landscape of augmented reality,
opening new perspectives of interdisciplinary research, given the vastness of areas for using
augmented reality technologies and applications and their present stage of knowledge,
experimentation and employment.

i
cross-platform API for full-function 2D and 3D graphics on embedded systems - including consoles, phones,
appliances and vehicles, source: http://www.khronos.org/opengles/, accessed on January 2013
ii
a set of development tools used to develop applications for Android platform, source:
http://www.techopedia.com/definition/4220/android-sdk, accessed on January 2013

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of Economics and Issue 2(18),
Public Administration 2013

AN ADVERTISING OLIGOPOLY
Ph.D. Student Alina Irina GHIRVU
Faculty of Economical Sciences and Business Administration Babeş‐Bolyai University, Cluj – Napoca, Romania
alina.ghirvu@ubbcluj.ro

Abstract:
This paper proposes a model of advertising competition based on the Cournot oligopoly model using a dynamic
system, the equilibrium points of which can be determined analytically. We consider several cases for explaining the
way in which firms will adapt their own advertising volume, depending on the number and the advertising volume of
their competitors, in the context of an online video game used for advertising purposes. The dynamic setup is given by
online Internet connection that allows interaction and communication and the high level of technology that permits
nowadays real-time advertising insertions.

Key words: advergame, dynamic system, Cournot oligopoly, advertising, video game

JEL classification: C72

1. INTRODUCTION

The development of computer and Internet technology made video games become highly
complex and interactive. Companies interested in new marketing extensions from classic models
gained upon their competitors by using video games as a communication tool for increasing
receptiveness of the brand message.
Video games were first studied in the academic world only recently, the year 2001 being
considered to be the moment when video games began to be treated “seriously”. The fast impact on
the audience made video game become a real breakthrough in advertising and a powerful
competitor for traditional media as television and movies.
Advertising and video games meet in two major ways: advergames and in-game advertising.
An advergame represents a video game constructed around a brand or product, sponsored by a
marketer and constructed for delivering the brand messages. It has an immersive mix of advertising
and entertainment and can be accessed online through corporate or brand websites.
In-game advertising represents an integration of advertising messages in a video game that
has a story already created and is coordinated and sold by independent gaming organizations, using
dynamic ad-insertion networks (Winkler and Buckner, 2006).
The purpose of advertising using video games is to increase brand awareness and familiarity
with the brands and products advertised, to build long time relations with the consumers, positive
feelings, sympathy and fidelity and to increase purchase intention that will be later transform in
actual sales and increasing profits.

2. BACKGROUND

The existing literature regarding dynamic models of advertising includes multiple studies on
how advertising works. Studies about direct relations established between the sales rates of change
and the advertising effort of firms have their origins back to Vidale and Wolfe (1957). Most
relevant works approach the issue of optimal advertising in a duopolistic market discussed by
Leitmann and Schmitendorf (1978).
There were several attempts to bring dynamic analysis of advertising competition to an
oligopoly setting, in which more than two competitors are involved. The model that Feichtinger
(1983) proposed was an extension from a differential game between two profit maximizing firms to
the case of general effectiveness functions for advertising. Analysis of Nash equilibrium solutions
was applied to the Leitmann-Schmitendorf advertising model for investigating the structure of

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optimal advertising rates. By setting up a dynamic advertising model in a duopoly competition


setup, Erickson (1985) provided important aspects on the ways that advertising can operate in
competitive and dynamic markets.
A group of studies about dynamic models of advertising originates from Nerlove and Arrow
(1962) and deals with using advertising for increasing the stock of goodwill and recommendation,
considering that the cumulate effect of past and present advertising expenditures influences the
current demand for the goods that the firm provides.
His model was later used in studies of Sethi (1977), Fersthman (1984) and Jorjensen (1999).
The game theory groundwork of dynamic differential games allows to forecast strategy
adopted by the players and to anticipate their moves. Studies about advertising strategies used
differential games to analyze current outcomes of a firm, advertising decision effects and
advertising implications in the future of a brand or product. Many differential game models applied
numerical, analytical, qualitative and empirical methods for studying situations that involve
dynamic advertising competitions (Erickson, 1995).
The problem o