Management of Enterprise Development in The Conditions of Institutional Changes... Corrected (Full Cover)

"In modern conditions, institutional changes and economic reform have direct impact on
the functioning of enterprises, their effectiveness, profitability, and the ability to quickly
adapt to environmental challenges. This involves the use of modern methods, approaches,
and strategic management tools when managing the development of enterprises.
To provide enterprises with sustainable competitive advantages and implement an effec-
tive development strategy, one needs to understand the challenges of the institutional
environment and the deep-seated processes of economic reform.
These problems are considered by the authors of the monograph Management of enter-
prise development in the conditions of institutional changes and reforming of the economy.
In the monograph, scientists discuss key problems of effective management of the
development of enterprises, including the production, social, logistics, marketing and
management systems.
The monograph includes theoretical and methodological approaches to enterprise deve-
lopment management, such as:
- Economic management with regarding evaluation of reproductive disproportions;
- Formation of institutional conditions for the effective management of innovation;
- Features of management production processes in the conditions of vagueness of external environment;
- Social-economic and environmental sustainability of reform: indicators and methods of evaluation;
- The essence and concept of business activity management;
- Theoretical and methodological bases of definition of the organizational development of the enter-
prise and assessment of its efficiency;
- Management of a group of companies in the fields of: accounting, reporting and control;
- Theoretical foundations of accounting outsourcing in Ukraine;
- Using the tools of audit and diagnostics in marketing policy of companies in Ukraine;
- Marketing of tourist flow as an instrument of development of tourism in the region;
- Logistic management approach to the machine-building enterprises in the period of global challenges;
- Improving the management of industrial development in the context of the policy of neo-industrialization.
We hope that the monograph will be useful for scientists, undergraduates, doctoral
students, and business representatives".
Prof. Dr. Alvydas Baležentis

Mykolas Romeris University, Vilnius, Lithuania
,6%1

[THIS PAGE INTENTIONALLY LEFT BLANK]
MANAGEMENT OF
ENTERPRISE DEVELOPMENT
IN THE CONDITIONS OF
INSTITUTIONAL CHANGES AND
REFORMING OF THE ECONOMY
ODESSA I.I. MECHNIKOV NATIONAL UNIVERSITY (UKRAINE)
NATIONAL UNIVERSITY OF LIFE AND ENVIRONMENTAL SCIENCES OF UKRAINE (UKRAINE)
UNIVERSITI TEKNOLOGI MALAYSIA (MALAYSIA)
MANAGEMENT OF
A monograph
edited by
Scientific and
Leading editors:
Vitalii Nitsenko
Tetiana Mostenska
Abbas Mardani
Odessa – Kyiv – Skudai-Johor – Olsztyn

2019
This monograph is a collective effort of researchers from Ukraine and Malaysia a wide
representation of leading universities on the subject of management of enterprises, their
development, as well as reforming of the economy.
OFFICIAL REVIEWERS OF THE MONOGRAPH:

Prof. Dr. Alvydas Baležentis (PhD, DSc, ProfTit), Mykolas Romeris University, Vilnius, Lithuania
Prof. Dr. Katarzyna Glabicka-Auleytner (PhD, DSc, ProfTit), Kazimierz Pulaski University of
Technology and Humanities in Radom, Poland
Prof. Dr. Svitlana Gutkevych (PhD, DSc, ProfTit), European University, Ukraine
Prof. Dr. Mykola Parchomets (PhD, DSc, ProfTit), Ternopil National Economic University, Ukraine
Dr. Olena Dragan (PhD, DSc), National University of Food Technologies, Ukraine
SCIENTIFIC EDITORS OF THE MONOGRAPH:

Prof. Dr. Vitalii Nitsenko (PhD, DSc, ProfTit), Odessa I.I. Mechnikov National University, Ukraine
Prof. Dr. Tetiana Mostenska (PhD, DSc, ProfTit), National University of Life and Environmental
Sciences of Ukraine
Dr. Abbas Mardani (PhD), Universiti Teknologi Malaysia, Skudai, Johor, Malaysia
TECHNICAL EDITOR OF THE MONOGRAPH:

Dr. Kamil Sygidus (PhD)
GRAPHIC DESIGN AND TYPOGRAPHY:

Dr. Kamil Sygidus (PhD)
COVER DESIGN:
Dr. Kamil Sygidus (PhD), Photo by Henry & Co. from Pexels
PRINTING HOUSE:
Bookmarked Publishing & Editing
Vitalii Nitsenko, Tetiana Mostenska, Abbas Mardani (scientific editors). Management of

enterprise development in the conditions of institutional changes and reforming of the
economy. A monograph. -Odessa – Kyiv – Skudai-Johor – Olsztyn: Bookmarked Publishing &
Editing, 2019. -Bibliogr. –Iliustr. - 200 p.
All rights reserved. No part of this book may be reproduced or distributed in any form or by any means, or
stored in a database or retrieval system, without the prior written permission of the publisher.
© 2019 Odessa I.I. Mechnikov National University

© 2019 National University of Life and Environmental Sciences of Ukraine
© 2019 Universiti Teknologi Malaysia
© 2019 Bookmarked Publishing & Editing
ISBN 978-83-952465-4-8
MANAGEMENT OF ENTERPRISE DEVELOPMENT IN THE CONDITIONS OF
INSTITUTIONAL CHANGES AND REFORMING OF THE ECONOMY
List of Contents
INTRODUCTION...................................................................................................................................7
Chapter 1.
ECONOMIC MANAGEMENT WITH REGARDING EVALUATION
OF REPRODUCTIVE DISPROPORATIONS
K. Pavlov, A. Mardani, O. Yevdokimova, N. Burdeina..............................................................11
Chapter 2.
FORMATION OF INSTITUTIONAL CONDITIONS FOR THE EFFECTIVE
MANAGEMENT OF INNOVATION
L. Nikiforova, A. Shiyan, M.A. Hassan, O. Darushin.................................................................27
Chapter 3.
FEATURES OF MANAGEMENT PRODUCTION PROCESSES IN THE
CONDITIONS OF VAGUENESS OF EXTERNAL ENVIRONMENT
K. Pavlov, A. Mardani, N. Mamontenko, I. Hanzhurenko......................................................49
Chapter 4.
SOCIAL-ECONOMIC AND ENVIRONMENTAL SUSTAINABILITY
OF REFORM: INDICATORS AND METHODS OF EVALUATION
K. Pavlov, O. Zakharchenko, N. Zakuan, S. Kolodynskyi.....................................................57
Chapter 5.
THE ESSENCE AND CONCEPT OF BUSINESS ACTIVITY
AND ITS MANAGEMENT
M. Hodyashchev, N. Rekova, U.N. Ahmad....................................................................................67
Chapter 6.
THEORETICAL AND METHODOLOGICAL BASES OF DEFINITION
OF THE ORGANIZATIONAL DEVELOPMENT OF THE ENTERPRISE
AND ASSESSMENT OF ITS EFFICIENCY
T.L. Mostenska, O. Ralko, I. Shkrabak...............................................................................................79
Chapter 7.
MANAGEMENT OF A GROUP OF COMPANIES IN THE FIELDS
OF: ACCOUNTING, REPORTING AND CONTROL
V. Panteleiev, K. Bezverkhyi, A.Mardani, M. Ponomarova...................................................95
Chapter 8.
THEORETICAL FOUNDATIONS OF ACCOUNTING OUTSOURCING
IN UKRAINE
O. Moskalenko, R. Piskunov, V. Kostyanyk, H.M. Yusof........................................................111
Chapter 9.
USING THE TOOLS OF AUDIT AND DIAGNOSTICS IN MARKETING
POLICY OF COMPANIES IN UKRAINE
N. Andryeyeva, D. Zinkovska, R. Mohd Nor.................................................................................123
List of Contents
Chapter 10.
MARKETING OF TOURIST FLOW AS AN INSTRUMENT
OF DEVELOPMENT OF TOURISM IN THE REGION
S. Nezdoyminov, O. Shykina, N.Z. Md Salleh...............................................................................135
Chapter 11.
LOGISTIC MANAGEMENT APPROACH TO THE MACHINE-BUILDING
ENTERPRISES IN THE PERIOD OF GLOBAL CHALLENGES
O. Chukurna, V. Nitsenko, S.Z. Omain..............................................................................................145
Chapter 12.
IMPROVING THE MANAGEMENT OF INDUSTRIAL DEVELOPMENT IN THE
CONTEXT OF THE POLICY OF NEO-INDUSTRIALIZATION
L. Deyneko, E. Sheludko, O. Kyshnіrenko, I.Romaniuk, N.Loganathan.......................165
ABOUT THE EDITORS.......................................................................................................................195
ABOUT THE AUTHORS....................................................................................................................197
6
Introduction
T he rapid and difficult to predict changes of the external environment imply the
need to develop mechanisms and tools for managing enterprises that ensure their
effective development and adaptation to the external environment. The issues of man-
agement of enterprise development gain specific relevance in the context of institutional
changes and economic reform.
Ensuring the effective functioning of the enterprise involves its continuous devel-
opment, which contributes to the retention and creation of competitive advantages and
which forms commercial and financial stability.
European integration processes, changes in the market conditions in an open economy
and globalization processes, limited financial resources and expensive credit, reduced in-
vestment and innovation activity, decreased productivity, aging of fixed assets lead to a de-
crease in production profitability, deterioration of financial indicators and, thus, require
special management tools. In these conditions, it is necessary to develop measures that will
attribute not only to the survival of enterprises, but also to their effective development.
In order to determine the directions and the choice of the enterprise development
strategy, it is necessary to improve the enterprise management system.
This monograph consists of 12 parts, is devoted to solving the problems of managing the
development of an enterprise in the context of institutional changes and economic reform.
Chapter 1. Economic management with regarding evaluation of reproductive disproportions
(Konstantin Pavlov, Abbas Mardani, Olha Yevdokimova, Nadya Burdeina). The authors
substantiate the expediency of using various levels, forms and types of structural trans-
formations depending on the type of structural disproportion. The priority directions of
structural adjustment in the machine-building complex are: the improvement of the tech-
nical level of products, the re-equipment of defense enterprises, the expansion of the use
of advanced technologies, and the support of knowledge-intensive industries. The consid-
ered approaches to mitigating reproductive imbalances constitute a block of managerial
decision-making based on taking into account these disparities.
Chapter 2. Formation of institutional conditions for the effective management of innova-
tion (Liliya Nikiforova, Anatoliy Shiyan, Mohamed Ayyub Hassan, Oleksandr Darushin).
The authors described the mechanism of correction of innovative institutions in Ukraine
and Russia, which is based on the game model. The necessary conditions for an innovator
are described, including: an increase in free time and wages, an increase in the freedom
to attract students and in the professors’ mobility. The role of integration of Ukrainian
innovators into the international space is defined.
Chapter 3. Features of management production processes in the conditions of vagueness of
external environment (Konstantin Pavlov, Abbas Mardani, Nataliia Mamontenko, Iryna
Hanzhurenko). The authors concluded that the choice of alternatives from a set of alter-
native solutions is one of the forms of manifestation of uncertainty. While the choice of
Introduction
an entrepreneurial strategy is not an exception. To solve this problem, it is advisable to use

multi-criteria optimization methods, such as Pareto optimization method. A prerequisite
for this is the need to take into account the conditions of market development and the
influence of other factors, determining the degree of risk. It was concluded that produc-
tion management under conditions of a higher level of uncertainty of the external envi-
ronment should occur in a fundamentally different form with the use of other methods.
Chapter 4. Social-economic and environmental sustainability of reform: indicators and
methods of evaluation (Konstantin Pavlov, Oleg Zakharchenko, Norhayati Zakuan, Sergii
Kolodynskyi). The authors identify problems related to the implementation of reforms,
monitor the socio-economic status and analyze environmental sustainability. To ensure
sustainable development and the development of the country's environmental and eco-
nomic policy, the solution of the problem of the optimal choice of elements of the ecolog-
ical-economic core of the national economy plays a leading role.
Chapter 5. The essence of the concept of business activity and its management (Maksym
Hodyashchev, Nataliia Rekova, Ungku Norulkamar Ahmad). Scientists distinguish two
points of view on the management of the effectiveness of entrepreneurial activities: so-
cio-economic management and management of the effectiveness of economic activity.
These approaches differ in methods and ways of management. The authors suggest to con-
sider business management as a complex of organizational, analytical, control measures
aimed at regulating and using the adaptive capacity of enterprises, consistent with the
requirements of a dynamic environment.
Chapter 6. Theoretical and methodological bases of definition of the organizational devel-
opment of the enterprise and assessment of its efficiency (Tetiana L. Mostenska, Oleksandra
Ralko, Iryna Shkrabak). After analyzing the theoretical and methodological approaches
to the definition of organizational development, the authors come to the conclusion that
organizational development is an effective tool for managing organizations. This is due
to the need to introduce more flexible and adaptive behavior, the purpose of which is to
ensure the achievement of strategic goals.
Chapter 7. Management of a group of companies in the fields of: accounting, reporting and
control (Volodymyr Panteleiev, Kostiantyn Bezverkhyi, Abbas Mardani, Maryna Ponoma-
rova). The authors characterize the features of the consolidated financial statements as an
independent source of additional information that expands the concept of reporting, the
essence of accounting principles, form the role of unified accounting. The consolidated
financial statement show assets, liabilities, capital of the parent (holding) company, un-
controlled participation in shares, income, expenses, cash flows from transactions with
third parties. Reporting is considered as a category to which the Group has an access. Such
reporting is an important part of the group report.
Chapter 8. Theoretical foundations of accounting for outsourcing in Ukraine (Olena
Moskalenko, Roman Piskunov, Veronika Kostyanyk, Halimah Mohd Yusof). The authors
justify the use of outsourcing in accounting as an effective business tool that allows com-
panies to gain a competitive advantage. At the same time, outsourcing has a number of
features that imply a clear analysis and control of all problems solved by enterprises, de-
termination of the compliance of strategic goals with the current tasks, and the definition
of the company that will carry out external accounting.
8
Introduction
Chapter 9. Using the tools of audit and diagnostics in marketing policy of companies in
Ukraine (Natalia Andryeyeva, Daria Zinkovska, Roshazlizawati Mohd Nor) The authors
concluded that marketing diagnostics can be considered both as a part of marketing audit
and as a marketing tool that can be effectively used to study and to improve the compa-
ny's activities. Marketing audit allows you to analyze the environment of the company, to
conduct competitors’ analysis, to determine the directions of formation of competitive
advantages and optimizing operating activities.
Chapter 10. Marketing of tourist flow as an instrument of development of tourism in the
region (Sergey Nezdoyminov, Olga Shykina, Nor Zafir Md Salleh). The authors consider
economic instruments of stimulation of tourism and recreation development in order
to increase the tourist flow into the Odessa region, as a reaction to the current trends
characterized by the predominance of the outgoing flow over the incoming, high share
of trips with the purpose of "recreation and entertainment", influence of motivation and
geographic factors on the distribution of tourist flow.
Chapter 11. Logistic management approach to the machine-building enterprises in the period
of global challenges (Olena Chukurna, Vitalii Nitsenko, Siti Zaleha Omain). The authors
analyzed the accounting of logistics costs in the financial statements of industrial enter-
prises and concluded that a revision of the traditional methods of accounting of logistics
costs adopted in accounting and management accounting is necessary. It is suggested to
differentiate two main items of logistics costs in the financial statements of industrial
enterprises: transportation costs and costs of inventory management, which requires a re-
vision of the generally accepted classification of logistics costs.
Chapter 12. Improving the management of industrial development in the context of the
policy of neo-industrialization (Lyudmila Deyneko, Ella Sheludko, Oksana Kyshnіrenko, Iry-
na Romaniuk, Nanthakumar Loganathan). The authors identified the features of sectoral
policies focused on specific groups of products. It is concluded that the types of sectoral
policies depend on the characteristics of goods’ production and sales. The basic mecha-
nisms of influence and priorities of the neo-industrial development of the industry, the
priority of investment projects, the organization of new modern processing industries
and the creation of new products, the support of entry into the global supply chains, the
creation of integration structures and of innovative organizational forms, the use of the
capabilities of European programs to create and transfer the scientific achievements of
enterprises, etc. are suggested.
Vitalii Nitsenko
Odessa I.I.Mechnikov National University, Ukraine
Tetiana Mostenska
National University of Life and Environmental
Sciences of Ukraine, Ukraine
Abbas Mardani
Universiti Teknologi Malaysia, Malaysia
9
Chapter 1.
ECONOMIC MANAGEMENT
WITH REGARDING EVALUATION
OF REPRODUCTIVE DISPROPORATIONS
Konstantin Pavlov, Abbas Mardani, Olha Yevdokimova, Nadya Burdeina
D ue to the fact that at present the complexity of production processes has imme-
asurably increased, the problem of finding effective management methods and en-
suring sustainable functioning of the economy has become extremely complicated. In the
transition period, when the instability and volatility of the organizational and economic
environment have significantly increased, the issues of governance and socio-economic fore-
casting naturally come to the fore. One of the most important causes of the increased uncer-
tainty and variability of the socioeconomic environment in recent times is the deepening of
various kinds of reproductive imbalances. Given all the above, it is advisable, in our opinion,
to consider some of the management and direction of managing the transition to a market
economy, in conditions of high volatility of the economic environment. Thus, a number of
researchers identify several stages in the development of systems of general corporate ma-
nagement abroad (Ansoff, 1989). These stages include control based on performance moni-
toring, management based on extrapolation, management based on anticipation of change
and management based on flexible emergency solutions that is currently being developed,
in conditions where many difficulties arise so unexpectedly that they can not be foreseen.
The complication of production processes and the growing instability of the organiza-
tional and economic environment lead to the need to develop a solution already when relati-
vely weak signals from the external environment arrive. Therefore, in the new economic con-
ditions immeasurably increase the role and importance of planning and forecasting, but not
the kind of planning, which operated under the socialist mode of production. The inherent
properties of inertia, the transfer of existing trends and management conditions to the futu-
re, etc., not only make it impossible to apply this form of planning in full at the present time,
but also are one of the most important reasons for the low effectiveness of the socialist eco-
nomy. In connection with the need to adapt the existing management system to qualitatively
new conditions, make it more flexible and more labile, in the developed capitalist countries
several forms of planning are used. In the long-term planning system, it is assumed that the
future can be predicted by extrapolating historically developed growth trends. In the system
of strategic planning, it is not considered that the future can be studied by extrapolation.
Here, in the beginning, an analysis of the company’s prospects is undertaken, during which
the trends, the chances of the firm, and individual emergencies that are capable of changing
Vitalii Nitsenko, Tetiana Mostenska, Abbas Mardani (scientific editors)
MANAGEMENT OF ENTERPRISE DEVELOPMENT IN THE CONDITIONS OF INSTITUTIONAL CHANGES AND REFORMING OF THE ECONOMY
the current trends are examined. The next stage is to study the positions in the competition.
At the stage, which has received the name of the strategy selection method, the company’s
perspectives in different types of activities are compared, priorities are established and reso-
urces are allocated between different activities to ensure the future strategy.
Thus, strategic planning is understood as the managerial process of creating and main-
taining a strategic correspondence between the objectives of the firm, its potential opportu-
nities and market opportunities. Further detailed plans are developed for individual types
of production and the release of specific goods and branded products, which is generally
referred to as marketing planning. There are also tactical, operational, etc. forms of mana-
gement and planning. The presence of various forms, types and methods of planning and
management, in our opinion, is a clear example of an attempt to adapt to the uncertainty
of the economic environment, to the growing complexity and instability of social processes.
The transition to market relations of the Russian economy, the numerous mistakes
that have arisen as a result of ill-conceived and lack of an integral, deeply developed,
logical concept of this transition also lead to an increase in the instability of the organi-
zational and economic environment. All this, on the one hand, makes it impossible to use
the rigidly centralized, directive form of planning and management of production that
was characteristic of the socialist period of development, on the other hand, extremely
actualizes the search for new forms and methods of management and planning, for, as
world experience proves, without using certain embodiments of the processes of modern
production management impossible. In this regard, for Russian enterprises at present, in
order to increase the efficiency of their production activities, it is advisable to use certain
elements characteristic of the management system of Western firms.
First of all, in our opinion, we should abandon the attempt to carry out comprehen-
sive planning of all aspects of the production and social activities of the enterprise col-
lective and concentrate on solving the most important problems. In this connection, we
note that in order to cope and master the rapidly changing situation in the market, in the
developed capitalist countries, the principle of timely decisions is adopted in the manage-
ment system of firms. In this so-called management by ranking strategic tasks, senior ma-
nagement along with the planned service of the firm divides all tasks into four categories:
a) the most urgent and important tasks that require immediate consideration;
b) important tasks of medium urgency, which can be solved within the next planned cycle;
c) important but non-urgent tasks requiring continuous monitoring;
d) tasks that are a false alarm and do not deserve further consideration.
This approach is very effective, and therefore its use as the basis for building a mana-
gement system for Russian enterprises in modern conditions seems timely and necessary.
Further, instead of drawing up a detailed plan, we should confine ourselves to develo-
ping a strategy for the development of the enterprise, for, again, experience of developed
countries shows that strategy is precisely the tool that can seriously help a company that
has found itself in conditions of instability. Here we mean strategy as a set of rules for deci-
sion-making, which guide the organization in its activities. Since the strategy of enterprise
development can vary depending on the situation in the macro- and microsphere of the
firm, it is advisable to develop a strategy for the future and its more detailed version for
the near future, and periodically adjust the strategy in accordance with the changes occu-
rring in the organizational and economic environment. Moreover, the specific value of the
12
Chapter 1. ECONOMIC MANAGEMENT WITH REGARDING EVALUATION OF REPRODUCTIVE DISPROPORATIONS
time interval of that perspective period for which the strategy is being developed should
be determined by the enterprise itself based on its capabilities and needs. However, given
the extremely high level of instability in the current economic situation in our country, it
seems that the significance of the time period should not be significant (a year for a strate-
gy for the future and a quarter for developing a more detailed version). But once again, we
emphasize that these values are recommendatory in nature, the choice is for the enterprise.
Similarly, the principles of strategy development should be carried out by the enterpri-
se itself, but it is possible to recommend, in accordance with the achievements of the foreign
management theory, special attention to such aspects of production activities as the pro-
spects for further growth, profitability and strategic vulnerability of the firm. In this regard,
it seems useful to use the provisions of marketing theory in the current process to manage
the Russian enterprises, taking into account the fact that the Russian market is currently
far from the level of development typical for the market of advanced capitalist countries.
Some of the most prominent theoreticians correctly point out that marketing is not
just advertising and the activity of the staff of sellers, but rather a comprehensive process
of adaptation to the use of the most profitable of the emerging market opportunities (Ko-
tler, 1990). In accordance with the achievements of the theory, the process of marketing
management consists of the following stages:
1. analysis of market opportunities;
2. selection of target markets;
3. developing a marketing mix;
4. the implementation of marketing activities.
At the present time, when the independence of Russian enterprises has immeasurably
increased, it is advisable to use many methods of marketing management in our country.
This is primarily the study and forecasting of demand, segmenting the market, selecting
the target market segments and positioning the product on the market. However, it should
be borne in mind that in modern marketing intersect and complement two aspects: on the
one hand, it is a comprehensive study of the market, demand and needs and the orienta-
tion of production on these requirements; on the other – an active impact on the market
and the existing demand, on the formation of needs and buying preferences. Therefore, the
second aspect should also be given enough attention. Thus, we should not confine ourselves
to studying the market and demand, we should actively form this demand as far as possible,
and, in our opinion, in conditions of a scarce market, it is immeasurably easier to carry out.
When studying the marketing capabilities of the enterprise in the methodological plan,
it is advisable to distinguish controlled and uncontrolled factors of the marketing environ-
ment (Evans, & Berman, 1990) and already taking this into account, start developing a stra-
tegy for the development of the firm. In the same process of planning strategies can be
identified in accordance with the recommendations of international scientists five stages:
1. the formation of a ranked complex of problems;
2. planning goals;
3. planning of means to achieve goals;
4. resource planning;
5. designing implementation and monitoring (Akoff, 1985).
13
Of course, all these proposals are recommendatory in nature, the management of the
enterprise itself must decide, in accordance with its capabilities and needs, which of them
should be used. Moreover, depending on the specifics of production activities, the package
of proposals can vary significantly. So, it is clear that the need for high-quality marketing
from companies currently carrying out mainly foreign economic activities is very high.
Thus, we can state that a qualitatively new level of uncertainty, instability and va-
riability of the organizational and economic environment, a high level of complexity of
production processes require a radical revision of the paradigm, management and planning
philosophy, and the search for new methods and methods for managing economic proces-
ses. Given these circumstances, as well as the limited possibilities of individuals conducting
administrative operations abroad in the developed capitalist countries adhere to the con-
cept of so-called incremental planning, when instead of trying to find the optimal parame-
ters of the system, they adhere to the position of limited rationality, determining the mode
of action that is good enough to produce a reasonable improvement in the current state
of the system (Saati & Kerns, 1991). In this regard, and for the effective implementation
of the management of Russian enterprises in the transition to market relations, it is advi-
sable to adhere to the concept of flexible indicative planning, using elements of different
approaches to management, forecasting and production planning, including strategic, sys-
temic, regulatory planning and other (the classic example of a flexible approach is the use
in the developed capitalist countries in the practice of strategic planning and forecasting
the development of the company’s matrix of opportunities for goods / markets). And it is
important to emphasize that the effectiveness of the use of various methods of managing
production processes is largely determined by the interaction of all elements of the eco-
nomic management system at different levels of the hierarchy: national, sectoral, regional,
at the level of the main economic link. Only in this way, in our opinion, it is possible with
a sufficient degree of reliability to manage the production process in such an unstable eco-
nomic environment and to create conditions for a natural transformation and an optimal
balance of subjective and objective factors, conscious and spontaneous forms of regulation,
planned and market management techniques and management. On the other hand, consi-
deration and analysis of methods of managing production processes allow us to concretize
the provisions of the concept of the optimal correlation of market and state regulators.
One of the most important conditions for the effective management of production
under the new conditions of management is the definition and consideration of various
reproductive imbalances, since various disproportions increase the uncertainty and varia-
bility of the economic environment. Their elimination or at least reduction of the negative
consequences arising in the socio-economic system as a consequence of their action will
significantly improve the functioning of this system and significantly reduce the uncerta-
inty of the external environment. Therefore, the use of information on a group of major
reproductive imbalances by the management bodies of any socio-economic system is the
most important condition for increasing its effectiveness in the face of uncertainty and
volatility in the organizational and economic environment. Moreover, in our opinion, in
the structure of the management system, it is necessary to single out a block of mana-
gerial decisions made on the basis of the revealed major disproportions arising in social
reproduction. Moreover, it is quite possible that this block will become the key one in the
overall management system. In addition to the methods of managing production processes
14
already discussed above, in the conditions of uncertainty of the environment, this module
will also include methods for making management decisions aimed at eliminating iden-
tified socio-economic imbalances. In this connection, let us consider the problem of the
existence of reproductive imbalances in more detail.
In any country, state power structures, as a rule, objectively seek to achieve the com-
plexity of the national economy in both sectoral and regional aspects. However, as the
experience of the development of the world economy shows, the complexity of the na-
tional economy, unfortunately, is rather an exception than the rule. The most important
characteristic of any national economy is the unevenness of its development. Unevenness
as a characteristic property of the development of any national economy is confirmed by
numerous examples. The validity of this provision is obvious for those countries (and their
majority), whose complex character of economy is very weakly expressed (i.e., they are
characterized by significant reproductive imbalances, the absence or weak development
of important industries and types of industries, etc.); in the case of those states that still
managed to form a relatively integral and complex national economy – the USA, the FRG,
Japan, the former Soviet Union and some others – this provision is also justified, since in
the economic history and these countries periods of uneven development of individual
links and elements of the economy (we recall the post-war Japan and South Korea, when
the rate was made to develop only a few industries; remember the period of socialist
industrialization, when the priority development of heavy industry has received, while
a number of other sectors of the Soviet economy was a very poorly developed; remember
capitalist industrialization, which began with light industry).
Even in those few countries in which the economy is relatively complex (whereas in
the vast majority of states it is not), an analysis of the dynamics of their economy shows
the uneven nature of the development of individual segments, industries and regions. In
other words, complexity as a feature of the economy is more an exception than a rule. The
fundamental property of the development of any national economy is its uneven nature,
therefore it is always possible to speak of a complex character of the national economy
only with a certain degree of conventionality. Moreover, what has been said is true not
only with expanded reproduction, but also in conditions of a decline in production, since
in the case of shrunken reproduction, there are cases of a landslide and uneven decline in
social reproduction. In this connection, it is possible to formulate a general law on the
uneven nature of the functioning of the national economy, which is fair both in the con-
ditions of recession and in conditions of the rise of social production (the unevenness of
social and economic development finds confirmation in the framework of the theory of
the economic core developed by us (Pavlov, 1998)).
Uneven socio-economic development is the objective basis for the emergence of va-
rious kinds of reproductive imbalances. To the objective factors of the emergence of eco-
nomic disproportions can also be attributed to the varying degree of the organic structure
of capital in different sectors of the national economy (for interbranch imbalances), terri-
torial differences in the supply of natural resources, labor resources, natural and climatic
features (for inter-regional imbalances), cyclical fluctuations, changes in the “supply-de-
mand” ratio (for general economic functional and elemental disproportions).
Along with the objective, it is possible to distinguish subjective factors of the emer-
gence of various kinds of socioeconomic imbalances. The latter can include mistakes in
15
the strategy and tactics of the reforms being implemented, miscalculations in economic
policy at different levels of the hierarchical system of government – economic, regional,
sectoral. If the importance of subjective factors for the onset of reproductive imbalances
can be greatly reduced, then the role of objective factors can be reduced only by changing
the conditions. Thus, completely eliminating the causes of the imbalance is impossible,
therefore, reproductive imbalances are unavoidable under any conditions and in any so-
cial system (by the way, even under socialism, despite the law of planning, it was not pos-
sible to eliminate disproportions). However, since imbalances have a significant impact
on socio-economic efficiency, it is of great importance to study them in their entirety,
that is, to identify the causes, conditions and factors for the appearance of disproportions,
their typology and classification, the quantitative assessment of disproportions, and the
development of methods for their elimination.
In other words, in economic theory, in our opinion, a section should appear in which
all possible aspects of reproductive imbalances are explored (a general theory of socio-e-
conomic imbalances should be developed). Since the release different types of imbalances
– economy-wide (for example, the system “production – distribution – exchange – con-
sumption” between its various elements), inter-regional, cross-industry, intra-regional, in-
tra, in the general theory of reproduction disproportions should appear relevant sections,
which analyze features of each of the above disproportions. Similarly, in economic stati-
stics, there may be sections that address the issues of assessing the impact of any kind of
reproductive imbalance on socio-economic efficiency, developing a system of indicators
that characterize this type of disproportion, and so on (perhaps in the economic statistics
of the block sections will appear in the foreseeable future, in which developed methods
statistical occurrence and overcome all kinds of reproductive imbalances). In manage-
ment, in our opinion, a section should also appear in which the features of managing
socio-economic systems based on identified reproductive imbalances will be analyzed.
Of course, when it comes to the need to formulate a general theory that explores the
manifold problems of the emergence and overcoming of reproductive imbalances (and
also speaks of the appearance of a corresponding section in economic statistics), it does
not mean that it will appear in a completely empty space.
At present, quite a lot of problems related to disproportions have been studied in
great detail. Especially many special studies are devoted to sectoral and regional imbalan-
ces. It is on their basis that one can see that there is much in common in various kinds of
reproductive imbalances – this circumstance serves as the basis for the need for a general
theory of reproductive imbalances. However, what has been said does not at all mean that
each of the varieties of disproportions does not have specific features – on the contrary,
and these features (and not only the general one, which is inherent in all types of dispro-
portions) should also be studied within the framework of this theory.
In order not to be unfounded and to verify the relevance of the development of this
kind of theory, let us consider some typical problems related to disproportions. One of
the most famous and studied varieties of reproductive imbalances are regional ones that
are inherent in almost all countries, including very small in area. There are two different
points of view on the problem of territorial inequality. In accordance with the first, in or-
der for the national economic complex of a state to develop normally, the socio-economic
differences between its regions should not be too great. It follows from the second ap-
16
proach that regional inequality is not only inevitable, it is also an incentive for backward
territories, and therefore numerous contrasts (for example, “center-periphery”) are not so
much a defect of development as a logical process.
Earlier it was noted that socio-economic inequality, including territorial – is the deep
basis of social development, therefore, the emergence of regional disparities is inevitable.
Moreover, territorial disproportions are often an incentive for the next stage of develop-
ment, which is implemented mainly as follows: in some centers, the latest technologies,
creative and prepared part of the labor potential are concentrated. Gradually these centers
become “poles of growth”, as the technogenic influence and the jump in efficiency from
them spreads outwards, to the periphery, which ultimately leads to weakening of contrasts.
Of the two considered viewpoints second accurately displays territorial aspect of inno-
vative development. However, the first point of view essentially correctly reflects the repro-
duction process, since if the socio-economic differences between the regions of the country
are very significant, this can seriously affect the normal functioning of the country’s economy.
There are several approaches to the classification of regions. Depending on the state
and conditions of operation, the regions are divided into the following groups: prospe-
rous; regions of sustainable development; stagnating; pioneer regions, or regions of new
development; crisis regions; regions with an emergency situation. Depending on the place
that the region occupies in the innovation process, the following regions are distinguished
according to typology: creative (advanced) and innovative, where basic innovations are
born and tested; adaptive territories that are able to widely implement innovations at the
stage of their mass distribution; conservative – areals that do not accept many innovations
(Ratner et al, 1996). In accordance with the classification, a differentiated approach to the
formation of economic policy at the territorial level is implemented (often a certain type
of social and economic policy is developed for each type of region). In this regard, a signi-
ficant interest may be the analysis of the experience of solving the problem of eliminating
(or rather, mitigate) the territorial disparities (regional disparities) abroad.
So, for example, the state actively intervenes in issues related to the forced develop-
ment of new areas of developed capitalist countries. In the post-war period, the core of the
new regions development programs adopted by the governments of the US, Canada, Au-
stralia, Sweden, Norway, and Denmark was the creation of infrastructure, primarily trans-
port infrastructure, namely, the implementation of these most capital-intensive and least
profitable projects, on the process of developing new regions in a country of developed
capitalism (Karpov & Bogdanov, 1974). Meaning state aid in the construction of transport
communications in developed areas is particularly high due to high transportation costs.
Some interest is the analysis of the issues of economic development of underdeveloped
areas. In Western Europe, the zone of underdevelopment (the economy of the underdevel-
oped regions is mainly of an agrarian nature, often of extensive character) covers primarily
the Mediterranean zone – the southern and southwestern regions of France, the southern
regions of Italy and Spain, and several others. Currently, the practice of programming
countries have developed some general methodological orientations for the development
of programs for underdeveloped regions. In regions that have sufficient demographic po-
tential and good conditions for supplying electricity and raw materials, programs can
provide for the creation of “poles of growth”, whereas in underdeveloped areas with low
population density, the creation of “poles of growth” is considered inexpedient (Karpov &
17
Bogdanov, 1974). In parallel with this, a number of measures are planned to “rationalize”
agriculture and construction in the field of municipal services. Of great importance is the
study of the specifics of economic policy and in regions of a different type.
Widespread problems of depressed areas in developed countries due to their decline.
The whole complex of measures aimed at encouraging the industrial development of de-
pressed areas is divided into two main groups: general methods and methods of a financial
nature. They study economic policy in other areas, for example, in “intermediate” areas.
Thus, along with the methods of managing the economy considered in the beginning of
the article in the context of uncertainty of the external environment, there are many
approaches to making managerial decisions based on the diversity of regional dispropor-
tions. Together, these methods will constitute a bloc in the structure of the management
system based on taking into account reproductive imbalances.
However, disproportions of regional development arise not only in the conditions of
the transition period. They take place practically in any socio-economic system, including
in the developed capitalist countries. Many disproportions inherited Russian society from
the socialist era. Thus, the stereotyped approach to the socialist industrialization of the
republics without due regard for regional conditions led to excessive saturation of their
heavy industry and ignoring the development of light, food and other industries that pro-
duce goods for the population (Kozlova et al., 1993). The emergence of many territorial
disproportions is not only due to subjective miscalculations and mistakes, but also has
an objective basis. For example, the vast majority of fuel and energy-intensive industries
are located in the European part of Russia, while the energy resources were concentrated
mainly in the east; On the other hand, in the eastern regions, significant capital invest-
ments were frozen while creating industry giants that are poorly provided with labor,
equipment, components and parts.
The collapse of the Soviet Union led to an aggravation of many regional disproportions
due to the severance of economic ties between the former union republics. For example,
work in the metallurgical refinery in Moldova has become much more complicated lately,
since scrap metal in the republic is not enough for it. In a crisis situation is a complex of
Belarusian enterprises of heavy and medium machine-building, which was built without
taking into account the remoteness of these enterprises from the base metal industry. Re-
cently, the severity of regional environmental problems is growing. Fifty-six cities, which
are Russia’s most important industrial centers, are oversaturated by harmful industries,
where environmental pollution is several times higher than the permissible standards,
which leads to increased morbidity and mortality of the population (Kozlova et al., 1993).
Some authors distinguish the following main stable pathologies of regional develop-
ment in the former USSR:
1. significant budget transfers and a sharp division of regions into donor regions and recipient regions;
2. deformation of investment flows (capital moves from regions where it can be used with maxi-
mum efficiency, to regions where it is used less efficiently);
3. the lack of a connection between the inflow of capital and the infrastructure of the territory,
the shift of production to undeveloped regions;
4. deformation of investment cycles, artificial depression in regions with favorable market condi-
tions and inexhaustible resource potential due to the permanent withdrawal of financial resources;
18
5. the formation of regions with sectoral diversification;

6. the preservation of the backward sectoral structure in the regions and the obstacles to im-
proving the structure from primary and secondary activities to the Tertiary and Quaternary;
7. disproportion between the level of development of specialization and complexing and servic-
ing complex, as well as a number of other regional pathologies (Dmitrieva, 1992).
Thus, there are a significant number of varieties of territorial imbalances. Like any pa-
thology, they can be stable or unstable, be reversible or irreversible, be determined by both
subjective and objective factors. Regional disproportions in the development of the na-
tional economy can be classified according to the following main groups (Nekrasov, 1975).
1. regional distribution of the natural complex;
2. socio-economic regional imbalances;
3. territorial disproportions in the energy complex;
4. regional disparities in industry;
5. territorial disproportions in the agrarian-industrial complex;
6. territorial distribution of the transport complex.
Other approaches to classification are possible.
The possibility of a scientific classification of territorial disparities is directly con-
nected with the problem of the definition and characteristics of the “regional standards”.
Of course, there should be no templates, since this “norm” for the regions of Europe, Asia
and the former USSR will be different. The only question is what is a “normal region” and
a “pathological region”. For the answer, detailed complex studies that take into account the
entire set of factors and parameters characterizing the concept of norm and deviation from
it are necessary. A key aspect of this problem is the choice of criteria and the development
of a system of indicators on the basis of which it is possible to determine the regional norm
and regional pathology. According to a number of authors, it is advisable to single out
various groups of indicators, in particular, groups of generalizing synthetic indicators that
determine the main economic processes of social production, and groups of specific natu-
ral and cost indicators for individual elements of territorial proportions (Mazanova, 1974).
Russian economic crisis, contributing to exacerbate regional imbalances, bared to re-
gionalism as a set of scientific direction is extremely urgent problems requiring immediate
solutions. Certain crisis phenomena arising in the Russian regional science are largely due
to the fact that the Soviet regionalistics, rigidly oriented to the development of pre-plan-
ning documents, often adjusted opportunistically to the directives of the governing bodies.
The multifaceted objective contradictory nature of the distribution of productive forces
and the resettlement of the population was underestimated. In studies of different regions
and settlements poorly taken into account regional and local features of the socio-econom-
ic development, environmental situation, national and demographic factors. The combi-
nation of the branch and territorial approach in the development of the national economy
was not ensured. The idea of a uniform distribution of production and population resettle-
ment, “leveling” in territorial development prevailed (Kozlova et al., 1993).
The aim of the theory, in which territorial disproportions are studied (it can be called
regional pathoeconomics (Luzin & Pavlov, 1999)) is to solve such problems. Of course, all the
valuable and positive things that have been accumulated by the Soviet regionalism must be
taken into account and used in it. In our opinion, it is completely unjustifiable to indiscrim-
19
inately deny the achievements of the socialist stage in the development of economic science,
in particular, the planned state methods of economic regulation. In developed capitalist
countries, methods of state programming (including regional) economics, which are largely
borrowed from the arsenals of the system of management and planning by the socialist econ-
omy, are fruitfully developed and successfully applied. In the conditions of the transition
period, the role and importance of state regulation of reproductive processes is even greater.
At the same time, for the development of regional pathoeconomics, the use of region-
alist achievements in developed capitalist countries is of great importance. At the same
time, for the development of regional pathoeconomics, the use of regionalist achievements
in developed capitalist countries is of great importance. In general, there are four main
directions corresponding to the most important types of regional problems:
1. programs for the development of new areas;
2. programs for the development (industrialization) of underdeveloped regions;
3. programs for the development of industrial depressed areas;
4. programs and activities for densely populated areas with a high concentration of production.
The latter direction is accompanied by programs and activities for the protection of
the environment (Karpov & Bogdanov, 1974). It is also important that among foreign scho-
lars there is widespread belief in the fallacy of the approach underlying the regional events
that took place in the 60s – early 70s. Identification of problem areas and consideration
of their development paths in isolation from the ways of development of other economic
regions of the country is one of the most serious political mistakes, oriented to solving
specific problems (Sapozhnikov, Smolnikov & Vasilyev, 1981).
Regional pathoeconomics is designed to deal not only with territorial issues and
aspects of transition to market relations, but in general with any regional pathologies
and crisis phenomena, regardless of the type of social order – be it developed capitalism,
socialism or the conditions of the transition period. The study of territorial features of the
transition period is one of the most important and urgent problems of regional pathoeco-
nomics (in this connection, it is very interesting to analyze various territorial models of
transition to the market). It should be added that the regional aspect of market transfor-
mations is one of the least studied, and without taking into account territorial peculia-
rities in the economic policy of the transition period, the efficiency of the implemented
reforms significantly decreases.
The territorial imbalances can be assessed on the basis of the following system of indicators:
In the sphere of production:
1. The level of gross domestic (regional) product (GDP).
2. GDP growth rates per capita.
3. Ratio of growth rates of investments in fixed assets and GDP.
4. Share of GDP produced by state enterprises.
5. Growth of export potential.
6. Coefficient of the currency coverage of imports.
7. The index of the physical volume of industrial products (by types in comparable prices).
8. The degree of depreciation of fixed assets.
9. The specific weight of unprofitable enterprises.
20
10. Ratio of the number of scientific personnel and the number of employees in the sphere of
material production.
In the financial sphere:
1. The rate of bank loans.
2. Growth in investments in fixed assets.
3. The index of the ratio of taxes and other revenues to the regional budget and the GDP of
the region.
4. Price level (price ratio of current and base periods).
5. State support of the regions (growth rates of transfers and other assets).
6. The level of income and expenditure per capita GDP.
7. Budget security and sufficiency.
8. Specific weight of budget expenditures directed to investments.
9. Status of accounts payable and receivable, including taxes.
In the social sphere:
1. The share of wages in GDP.
2. Level of subsistence level.
3. The ratio of the average monthly wage and the subsistence minimum.
4. Arrears in payment of wages, pensions and benefits.
5. The proportion of the population with incomes below the subsistence minimum in the to-
tal population.
6. Dynamics of the share of savings (deposits, deposits, securities, real estate) in total per capi-
ta income.
7. Level of financing of social programs from the regional budget.
8. The ratio of spending on social programs and GDP in the region.
9. Natural decline and migration of the population.
10. The ratio of the average life expectancy to the standard.
11. The share of officially registered unemployed and the number of unemployed per seat.
12. Dynamics of population, active and employed population.
Territorial complex distortions can be evaluated based on the following formulas.
1. Efficiency of using the potential of the region (available economic resources):
n m
Ñ0 i =1
∑C − ∑C i j
E1 = =
j =1 , (1)
R0 Rc + Rl + Rw
where С0 is the number of use values calculated on the basis of market prices produced in the region from
available regional resources;
R0 – the number of economic resources available in the region (economic potential of the region);
Сi – the volume of sold goods and services of the i-th type, calculated in value terms on the basis of market prices,
including social and other services and goods provided to the population free of charge in the period under review;
n – the number of goods and services produced in the region during the period under review;
21
Сj – the volume of the sold goods and services of the j-th kind, calculated in value terms on the basis of
market prices, due to subsidies from the federal budget;
m – number of goods and services produced in the region at the expense of the federal budget;
Rc – the amount of capital available in the region (of all forms of ownership), including funds and items
of production, calculated in value terms on the basis of market valuation methods;
Rl – the value expression of the value of the available in the region economic resource “land” (based on
market valuation methods);
Rw is the amount of human capital available in the region, calculated in value terms on the basis of the
number of able-bodied population and the average wage.
In this formula, the value of use values is proposed to be determined on the basis of market
prices of goods and services produced in the region. We understand that such a comparison of
categories has a certain degree of acceptance, but it allows us to bring the numerator and de-
nominator of the formula to the comparability of units of measure (Smirnov & Shandirov, 1999).
2. Resource availability of the region per 1 km2 of territory (Rar):
R0
Rar = , (2)
A0
where A0 is the total area of the region in km2.
3. Resource provision of the region per 1 inhabitant (Rpri):
Ð0 ,
Ppri = (3)
H0
where H0 – the total population of the region.
4. Efficiency of the use of the applied resources of the region (resource return):
n
Ñ01 ∑ Ci
, (4)
E2 = = i =1
R01 Rc1 + Rl1 + Rw1 + R f
where С01 – the number of created use values (planned to be created), calculated on the basis of market
prices produced in the region);
R01 – the number of economic resources used (planned to be used);
Сi – the volume of goods and services of the i-th type sold (planned for sale), calculated in value terms on
the basis of market prices, including social and other types of services and goods provided to the population
free of charge in the period under review;
n – the number of goods and services produced (scheduled for production) in the region in the reporting period;
Rc1 is the amount of all forms of ownership applied in the region of fixed and working capital, calculated
in value terms (the amount of fixed capital is calculated as the average annual value of fixed production assets,
taking into account disposal and replenishment, if the calculation period is a year);
Rl1 – the value of the applied economic resources belonging to the “land” category, calculated in value
terms on the basis of market methods of valuation;
Rw1 – the amount of used labor and entrepreneurial abilities, calculated by determining the actually
paid (planned) salary in the period under review;
Rf – the amount of financial resources allocated from the federal budget in the period under review.
22
Along with regional imbalances, sectoral imbalances that have a lot in common with
territorial disproportions have also been thoroughly studied. The most important of these
are the disproportions between the basic industries and non-productive sectors. More-
over, it is interesting that if in the industrially developed countries, where crises and re-
cessions of production are repeated periodically, changes in the current market situation
are least affected by the release of new high-tech products, which creates impulses for
recovery from crisis situations, then Russia has a diametrically opposite tendency: (in this
connection, it is even possible to state the hypothesis that the economic core is collapsing
faster than other elements of socio-economic system). As a result, you can completely lose
accumulated over previous years technological capabilities, although not quality, but still
of fundamental importance for the further functioning of the economy. The decrease in
demand in consumer industries forced the machine industry to adapt to the conditions of
using its products, increasing the output of universal equipment and introducing primi-
tive technologies. With a shortage of capital investments from consumers and equipment
that supplies them with machinery, this will lead to the cessation of the production of
science-intensive products, the further curtailment of engineering and, ultimately, the
decay of the investment process, the liquidation of basic, life-sustaining branches of the
economy (Borisov & Tarakanov, 1994) (except raw materials with export potential), to
a decrease in the level of intensification and efficiency of all social production. The prob-
lems facing metallurgy can be divided into three groups (Budanov, 1994):
⁃⁃ resource due to long-term development trends;
⁃⁃ demand, resulting from the disintegration of a single economic space;
⁃⁃ technological, associated with the state of the production apparatus of metallurgy and other
factors. Machine builders need to focus on the creation and production of products for advan-
ced technologies, introduced in industry and agrocomplex. First of all, we mean: continuous
rock development, new technologies for extraction and low-waste processing of coal, oil, na-
tural gas, high-density energy technology, ultrahigh pressures and velocities, high-temperatu-
re superconductivity, environmentally friendly technologies for transforming unconventional
energy sources, highly productive processing technologies fertile soils, including for farming.
In our opinion, it is possible to change the existing state of affairs for the better only
on the basis of developing a concept of state regulation of transitional market reforms,
including (or better, first of all) state regulation of the process of intensifying social pro-
duction. In this connection, the development of the state program of intensification in
the conditions of the transition period with the identification of sectoral and regional
sections and the use of positive foreign experience in regulating the process of intensifica-
tion in the conditions of economic reform is extremely urgent (in our opinion, the South
Korean experience is most interesting here). In this concept, much attention should also
be paid to the state regulation of structural transformations in the economy, and it is very
important that structural transformations are interlinked with the process of intensifica-
tion and contribute to its effectiveness, in other words, that structural changes are a factor
in the intensification of social reproduction, it is so indeed.
It is expedient to distinguish different levels, forms and types of structural trans-
formations in accordance with what type of structural disproportion – economic, inter-
branch, sectoral, interregional, regional – these attempts are being made to eliminate.
23
For national economic, macrostructural problems whose solution is vital to the further
effective development of the Russian economy, should include such as the backlog of
non-material production, underdevelopment and in the functioning of branches of pro-
duction infrastructure, and especially transportation, warehousing and others. By sectoral
and intersectoral structural problems should include the following: in the forest complex
of the main tasks of structural policy is a significant increase in the proportion of chemical
technology the use of wood, its economy, the expansion of the production of pulp, paper
and board, the introduction of sulphite technologies and thus build logging volumes in
the inhabited areas of the country, it requires changes in the profile of the pulp and paper
engineering (Heinman, 1994). The priority areas of structural adjustment in the machine
building complex include improving the technical level of products, converting defense
enterprises, expanding the scale of the use of advanced technologies, supporting knowl-
edge-intensive industries. According to the estimates of foreign and domestic experts, the
following directions of STP are expected to be highly effective in the future: the elemental
base of electronics, computer technology, computer science and communications, bio-
technology, superconductivity, space technology, the production of industrial materials
and technologies for their use, new technologies and technical means in industries, new
service technologies (Borisov & Tarakanov, 1994). Along with the methods of management
of economic systems listed at the beginning of this article, the considered approaches to
mitigating reproductive imbalances will constitute a block of making managerial deci-
sions based on taking into account these disproportions. As we see, the creation of a gen-
eral theory of reproductive imbalances, including the identification in the theory of man-
agement of a special section in which methods of making managerial decisions based on
the account of socioeconomic imbalances are being studied, is indeed a very urgent task of
economic science, the solution of which will significantly affect on the effectiveness of the
functioning of the national economic complex.
References:
Akoff, R.L. (1985). Planning of the future corporation. Trans. from English. Moscow, Russia: Progress.
Ansoff, I. (1989). Strategic management. Abbr. Trans. from English. Moscow, Russia: Economics.
Borisov, V. & Tarakanov, G. (1994). Priorities of machine-building complex. The Economist, 6, 24–30.
Budanov, I. (1994). Ferrous Metallurgy: Opportunities for overcoming the Crisis. The Econo-
mist, 5, 14–22.
Dmitrieva, O.G. (1992). Regional economic diagnostics. St. Petersburg, Russia: Publishing House
of the University of Economics and Finance.
Evans, J. & Berman, B. (1990). Marketing. Abbr. Trans. from English. Moscow, Russia: Economics.
Heinman, S. (1994). To the development of structural investment policy. The Economist, 6, 67–71.
Karpov, L.N. & Bogdanov, O.S. (1974). Regional programming in developed capitalist countries.
Moscow, Russia: Nauka.
Kotler, F. (1990). Fundamentals of Marketing. Trans. from English. Moscow, Russia: Progress.
Kozlova, L.A., Ilyin, I.A., Shtulberga, B.M. etc. (1993). Regional economy: new approaches. Mos-
cow, Russia: Nauka.
Luzin, G.P. & Pavlov, K.V. (1999). Pathoeconomics, or a general theory of transition, crisis socio-eco-
nomic processes and states. Murmansk, Russia: region. book. edition.
Mazanova, M.B. (1974). Territorial proportions of the national economy of the USSR. Moscow, Russia: Nauka.
24
Nekrasov, N.N. (1975). Regional economy (theory, problems, methods). Moscow, Russia: Economics.
Pavlov, K.V. (1998). General theory of socio-economic policy. Izhevsk, Russia: Publishing house of
the Udmurt state. university.
Ratner, N.M., Yatnov, V.A., Nesterenko, O.N. & Kapustina, L.M. (1996). Regional disproportions:
assessment and ways to overcome them. Ekaterinburg, Russia: Publishing house Ural. St. Econ. University.
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Moscow, Russia: Radio and Communication.
Sapozhnikov, A.D., Smolnikov, M.V. & Vasilyev, V.A. (1981). Bourgeois regional theory and
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Smirnov, E.B. & Shandirov, O.L. (1999). Assessment of socio-economic efficiency of regional
development and tax regulation. Journal of Region: politics, economics, sociology, 5–6, 12–16.
25
Chapter 2.
FORMATION OF INSTITUTIONAL
CONDITIONS FOR THE EFFECTIVE
MANAGEMENT OF INNOVATION
Liliya Nikiforova, Anatoliy Shiyan, Mohamed Ayyub Hassan,
Oleksandr Darushin
Introduction
I t is well-known that innovations are a necessary condition for economic develop-

ment and growth. Innovations are always externalities for the economy and, conse-
quently, for their integration into the economy are necessary by the special institutions.
Despite the fact that in every country the innovation institutions were formed in a special
pattern, we can identify some common patterns that are characteristic of “successful”
countries. Moreover, over time, structures of innovation institutions in developed coun-
tries have been unified.
In this paper we will consider the term of “innovation” as new product, service or
knowledge, which are created by scientists and which can to produce by company. Only
such innovations have the world novelty, and only such innovations can to provide the
sustainable development for the country. Diffusion of innovations is not considered due
to the fact that Ukraine today there is still opportunity to make a world-class innovations.
So the question that is crucial for countries with developing economies can be formu-
lated as follows: “What are the major institutional differences between innovation insti-
tutions in developed and developing countries?”
Finding the answer to this question, the mechanisms needed to transform the existing
institutions of innovation, or to create the necessary institutions can be developed.
As a result, the developing economies must be integrated into the international eco-
nomy. For the success of this process it is very important to find the characteristics that
indicate the presence and condition for effective work of innovation institutions in the
country. For foreign financial and economic organizations, information on these charac-
teristics will be crucial for decision making.
Ukraine showed the most striking example for the influence of institutions on the
level of innovation. Despite the high scientific potential, they do not produce more inno-
vation than countries with lower research capabilities.
Thus, there are necessary conditions for the transition economies in Ukraine. There-
fore answers should be obtained on the following questions:
1. What are the key differences between innovation institutions in Ukraine, with innovative
institutions in developed countries? It is important to trace the historical causes of these dif-
ferences from the developed innovation institutions in the world.
2. Is there a benefit to Ukraine in the use of innovation institutions that are characteristic of
developed countries? Quantitative estimates for the economic effect of such a transition must
be obtained. These estimates will take a decision on the question: can do the conversion of
innovation institutions from domestic resources? Interests of the stakeholders also need to
define this transformation.
3. What are the institutional peculiarities of Ukraine, which would mean that these countries
begin to develop the effective innovative institutions? And how is far along they way? It is ne-
cessary to integrate the economies of Ukraine in the international economy. This is necessary
for investors to make decisions.
The present paper focuses on providing of answers to the questions formulated above.
Review of the literature, which describes the functioning of innovation institutions
in developed countries and transition economies, is carried out in Section 2. In section
3, a description of historical reasons due to which the present institutions of innovation
has been formed in Russia and Ukraine is presented. In section 4 the model for working
of innovation institutions in Ukraine is described. The two main mechanism of innova-
tion implementation are considered. Estimates of losses due to inefficiency of innovation
institutions in Ukraine are discussed. The mechanism of the formation of effective in-
novation institutions in Ukraine, which takes into account the interests of the company
and an innovator, is described in Section 5. Empirical evidence on changing of innovation
institutions in Ukraine are given in Section 6. It is shown that there are a great difference
between conditions for innovation implementation between Russia and Ukraine. The
mechanism for correction of innovation institutions in Ukraine is discussed. In Section 7
main results of paper are concluded.
There is little papers in which a problems with the key reasons for existing innovation
institutions and them correction was studied. However, in the post-Soviet countries, espe-
cially Ukraine, the problem of transition to innovation institutions, which like in developed
economies, was absolutely essential. Only by creating appropriate institutions of science and
the application of scientific results can provide an effective mechanism for economic growth.
Taylor (2009) investigated the problem of comparing innovation institutions in dif-
ferent countries in order to explain the success of innovative countries in the world. Au-
thor compares the effect of domestic and international institutions, and concludes that
international organizations can play a significant role under certain conditions. However,
the empirical picture is provided by countries in which science develops mainly in uni-
versities. Countries such as Ukraine, which have enormous scientific potential outside
the university, are not considered. So the question of the decisive influence of domestic
institutions of innovation in these countries is still open.
There are several works in which the problem of changing innovation institutions in
countries with transitional economies are studied. These studies are mostly descriptive.
Unfortunately, these papers do not address the question of the influence of the specific
structure of institutions of science and of universities in innovation. For example, in (Mu-
eller, 2006) the questions of the transformation of innovation institutions in the Czech
28
Liliya Nikiforova, Anatoliy Shiyan, Mohamed Ayyub Hassan, Oleksandr Darushin
Chapter 2. FORMATION OF INSTITUTIONAL CONDITIONS FOR THE EFFECTIVE MANAGEMENT OF INNOVATION
Republic were investigated. Several possible schemes for the transformation of innovation
systems in this country have been proposed. But an assessment of the economic benefits or
empirical evidence has not been presented.
Izhutov (2010) examined the effectiveness of research for Academicians of mathema-
tics in the Russian Academy of Sciences. Has shown that today there is an objective dete-
rioration of Russian Academy of Sciences, in comparison with the Soviet period: acade-
mic performance of new members has declined each year. This effect is valid for Ukraine,
too (Shiyan & Nikiforova, 2015).
In (Stepanova, 2010) some barriers in innovation economics and innovation challen-
ges were named. But in this paper the analysis of the reasons for such state of innovation
institutions and of the argumentations for correction of innovation institutions were
not investigated.
In contrast, innovation institutions in developed countries have been studied in detail.
Jones (2010) shows that the development of science in the economies of developed
countries require the government and the institutional supports at all stages of profes-
sional careers for scientists, including long-term study period and to obtain grants for
outstanding research
Singh and Agrawal (2010) showed that new professionals entering the firm actively
use their own previously formed ideas. Thus, previous background brings a specialist for
almost half the firm support of innovation to the company.
Veugelers, Tanayama and Toivanen (2009) analyzed the innovation systems of Finland
and noticed that the quality of research is rising, which is best achieved by granting au-
tonomy to the universities and encourage them by supporting research programs. It was
noted that European universities are suppressed as a combination of excessive government
control and mismanagement, coupled with inadequate funding opportunities.
Aghion et al (2008) and Loginova (2007) examined the features of research in terms of
the full protection of property rights in innovation communication between the academic
and private sectors, which differ sharply from those in the post-Soviet states.
Weinberg (2011) investigated the problem of brain drains in developing countries.
He‘s from the empirical data showed that 80% of the outstanding scientists, who are born
in developing countries, are currently in the developed world.
Gurkov (2011) conducted a study of innovation for executives (CEOs) in Russian ma-
nufacturing companies. He studied the changes in 2010 compared with 2005. It was found
that during this time Russian industrial companies increasingly have used some of the sta-
ges of the innovation process. However, he noted: «The owner's criteria for evaluating in-
novation effectiveness particularly impede radical product innovations and breakthrough
innovations in production technologies». The leading motive for objectives for owners
and CEOs of Russian industrial companies can be expressed as the overall profitability.
This significantly limits the number of active innovators in the industry. Author noted
that «for further studies is to create possibilities of international comparison of motives
for innovations, perceived innovation capabilities and innovative actions implemented».
But such activities require a substantial increase in international relations in the Rus-
sian context, particularly to improve the quality of economic education of the population.
However, for economic sciences in Russia and Ukraine (and for the humanities in general,
too), scientists are not integrated into the world of science, and, consequently, the prob-
29
lem of brain drain to this area of science is not valid. Unfortunately, this situation is the
institutional trap for the country.
First, the isolation from the world economy grows over time.
Secondly, the international isolation of a new generation of economists Ukraine inhe-
rited from the older generation.
Third, scientific decision-making level in the economy for political leadership in
Ukraine is worsening.
This is due to the fact that politicians are forced to turn to domestic economic scien-
tists for advice, and forecast only because of national security requirements.
We show in this paper that in Russia the situation is somewhat better than in Ukra-
ine. It is likely that without foreign aid Ukraine in the near future may become an example
of a country that may be underdeveloped due to imperfect institutions.
In (Aidt & Albornoz, 2011), the theory of new channels through which economic fac-
tors influence the political choices of the regime was built. It is shown that foreign direct
investment can be a tool for change of political regimes in developing countries.
In this paper we give evidence that the external economic support of these institu-
tions in Ukraine will contribute to the transition of these countries to developed status.
Thus, it is possible to develop technologies for exogenous change in domestic institutions.
Faber and Gerritse (2012) empirically investigated the impact of foreign determinants
of local institutions. It is shown that both trade openness and institutional proximity of
high-country benefit local institutional performance. At the same time, the impact of
foreign direct investment was not statistically significant. In this paper we show that for
Ukraine, improvement of economic education of the population can be selected as foreign
determinants that affect the domestic institutions of innovation.
In this paper conditions under which the innovation institutions in Ukraine could be
improved to be effective, are described.
1. Historical origin of higher education institutions and science in USSR

The historical causes for creating the institution are essential. They define the rules of
games that are common to many generations. Moreover, since these rules are included in
the culture and traditions for future generations, they appear as a “solid framework”. Thus,
subsequent generations adopt these rules, frames, as the only option.
That is what happened in Ukraine. After independence in 1991, country had the initial
conditions is much higher than other undeveloped countries. Their scientific and tech-
nological level of that time was considerably higher than in undeveloped countries (for
example, than in China). The education system has a higher level, too.
However, after 1991 there was no increase in the level of innovation activity in Ukra-
ine. Instead, the projected growth was replaced by a sharp decline. We believe that the
reason for this is inefficient innovation institutions in Ukraine. They were inherited in
Ukraine from the Soviet Union and become ineffective in a market economy.
The structure of the innovation institutions in the Soviet Union radically different
from that in developed countries. In this section we briefly describe the reasons for its
formation (see, e.g., Shiyan, & Nikiforova, 2015). This will facilitate the establishment of
mechanisms for the correction of innovation institutions in Ukraine.
Let us begin after the revolution of 1917. Why is there a need to reorganize the system
30
of higher education, which was inherited from the Empire Russia? It should be noted that
the Institutions of Science until 1917 was included in the institutions of higher education.
We will explore the rational behavior of key players who make decisions.
Thus, we consider the system of higher education, which the Soviet Union was in
the early 1920s. The existing system of higher education has been focused on the “hostile
classes” (as the Communist Party called them) – the bourgeoisie and the nobility. For
example, after studying at the university anyone has to be introduced into the nobility or
to be attached to the bourgeoisie
Thus, from the standpoint of the Communist Party, higher education institutions
should be changed. Direction of change should be as follows.
First, only the proletariat could be teach in higher schools. But as a rule, the Com-
munists did not graduate from university. So they were forced to use the “old” professors,
which they called “red specialists”. Contacts the “red specialists” with the students were
limited to monitoring the Communists.
Second, only the workers and peasants and their children were to become universi-
ty students.
Third, many engineers and other professionals with higher education for industrialization
were necessary. New teachers are especially needed because the existing teachers have focused
on training students in the “bourgeois values” (this was unacceptable to the Soviet Union).
In the 1920s and early 1930s, the optimal criterion for institutions of higher education
in the Soviet Union was found by using a method of trial and error.
This has been done in the following:
⁃⁃ The first. New scientific degree “Candidate of Sciences” was created for young scientists of
proletarian origin. These are university graduates, “who were dedicated to the ideals of com-
munism”, were used as “scientific inspector” for “old” scientist. The scientific degree “Doctor
of Sciences” was left to separate the real scholars of the “proletarian scientists” (which were
used as “scientific inspector” in science). Academic degree (“Candidate” and “Doctor”), and
academic titles (“Docent” (equal to Associate Professor) and “The Professor”) have been pro-
vided by the Government of the Soviet Union. The salary for all “identical degrees and ti-
tles”, was the same throughout the country (and it does not depend on the work to humans).
⁃⁃ The second. “Old” professors were allowed to teach at the university, which were located in the
center (Moscow, Leningrad and several cities, etc.). Proletarian “scientific inspectors” should have
checked them. In fact, the “old” professors have been isolated from contact with young people.
⁃⁃ The third. Because the number of qualified teachers with scientific degrees and academic
titles were very low, so low-skilled people were used for training. These unqualified teachers
can only paraphrase the textbooks that were used by the “old” professors. Therefore, the
learning process was much more formalized and standardized. In addition, the teaching
load for teachers was greater (because now professors do not make scientific results). As
a result, the “equal experts” were of any university. The main feature of Soviet higher edu-
cation is that the education of engineer lasted at least 7–8 years. Extensive theoretical study
at the university was 5 years long. After graduation practical training was for 2–3 years in
the enterprise (in the status of “young professionals”). Please note that for the problem of
industrialization, this mechanism was effectively.
⁃⁃ The fourth. In Soviet universities only a short course “of the Soviet Economy” was presented
31
to the student. In the “economic” universities and departments only accounting and “the
economy of Marxism-Leninism” were taught.
⁃⁃ The fifth. “Old” Scientists have been transferred from universities to individual organiza-
tions. These organizations were called “Institutes of the Academy of Sciences” (USSR So-
viet republics) or “Institutes of the Department of Government” (Ministry, etc.). Thus, two
problems were solved. First, the “bourgeois” professors and scholars were separated from
young people. Second, the time to work on industrialization (military problems in the first
place) was provided to scientists.
Thus, today, Ukraine have innovative institutions that have the following characteristics:
1. Research institutions are separated from the higher education institutions.
2. The teachers of institutions of higher education paraphrase the textbooks only.
3. After graduation, 2–3 years of practical training necessary for young people.
4. University professors, students, the majority of people in Russia and the Ukraine (including
high level Government officials, parliamentarians and Government experts, etc.) do not have
any information on developed economy (especially as the market economy works.)
2. The model for working of innovation institutions in Ukraine

In general, there are different players that define the innovation institutes in Ukraine.
They are: a) innovator (creator); b) the company (firm); and c) the Government. The Govern-
ment is not only as an investor, which finances research and development. He is actively
involved in all stages of the innovation process. Government sets exogenous conditions for
the innovation agencies.
The innovator and the company are the main players in the innovation process. Their
relations in Ukraine can be represented as a dynamic game (see Fig. 1).
Fig. 1. Dynamic game for working of innovation institutions

Source: prepared by the authors.
The government sets the “rules” for innovators and companies (firms). It establishes
the laws and parameters influencing the decisions of other players.
Innovator has only two strategies: to “do” or “not to do” innovation. His/her utility
functions are defined by parameters that are dependent on the government, and the strat-
egy chosen by the firm.
32
The company can choose the four strategies. Strategy of “a” do not use this innovation.
Strategy “b” is the use of foreign innovations. The strategy “c” is the use of innovation,
when the communication takes place directly from the innovator. The strategy of “d” is
the use of innovation, when communication with the innovator is through the mediation
of the university.
The equilibrium solution is defined as Nash equilibrium. Depending on the ratio of
benefits can be realized by various economic scenarios.
The strategy “a” for open market will dominate others. For example, because the mar-
kets of Ukraine are open, innovative products and services will attract from abroad. So
innovation should be used by domestic firms.
Sustainable economic development in Ukraine is possible only when the company
would be advantageous to choose a strategy of “a” or “d”.
Let us to note that the influence of government in this game may be crucial: for exam-
ple, if the government chooses the conditions unfavorable to the innovator, the strategy
of “do not” means that the innovation will choose by him / her. In such cases, sustainable
development cannot be achieved.
In the next section, a comparison between firm’s incomes for choosing strategies “c”
and “d” will be investigated.
Estimates of the company’s profits. The purpose of this paragraph is the assessment reve-
nue to the company strategy “c” and “d”.
The ineffectiveness of innovative institutions in Ukraine emerged as a result of such
channels. Adding the investment required for each channel.
First, the innovations have a large number of individual stages, in contrast to develo-
ped countries.
Second, in Ukraine innovations have taken place in an environment of corruption.
Third, the possibility of innovation project failure can be occurred due to several
reasons: a) innovation may be lost (for example, because of the economic inefficiency of
a large number of unnecessary steps) c) innovation can be made by another company (for
example, when interim results have been stolen), etc.
Company’s revenue is the difference between profit and expenses of the company. The
profit of firm will only appear after the completion of the innovative project. The expenses
of firm are connected with financing all stages of innovation – from start to finish.
Let us consider the income strategy, “d”. The latter depends on: 1) phases of innovation
(represented by n); 2) corruption (which is common for financial flows in Ukraine), as well
as 3) the possibility of failure of the innovation project.
Some stages of the innovation process can be financed by the government. Other
stages are financed by the firm. As a result of the latter, the firm applied for patents to
protect their intellectual properties. Therefore, below let us assume that the firm finances
all stages of the innovation (as in the strategy of “d” and strategy “c”).
In general case, the profit at strategy “d” Id can be described as follows,
n
I d = β n (δ1...δ n −1 ) P0 + ∑ β i −1[Pi − (1 + α i )Ei ] . (1)
i =1
33
Here P0 is the revenue from the innovation. Pi is the expected revenue at the i-th stage (i=1,-
…n). Ei is the expected expenses at i-th stage. αi>0 is the level of corruption in the i-th stage (for
example, part of the funding at this stage, which is lost at corruption). 0<β<1 is the disco-
unt factor (the geometric average, when the length of each stage were taken into account).
δi are the probabilities that the innovation will remain relevant for the firm before the i-th
stage (for example, it may be the probability of leakage of information to another firm; it
may be the probability that the innovative project will be continued, and so on).
Now consider the profit for the strategy of “c”. In this case, the profits can be similarly
described. However, the strategy “c” in the number of steps is smaller than the strategy of
“d”. For example, the relationship between the innovator and the firm will skip some steps,
such as a report for a university for example.
The profit at strategy “c” Ic can be described as follows,
 L(k )
( ) .
m
I c = β m ( ρ1 ...ρ m−1 ) P0 + ∑ β k −1  ∑ Pl k − (1 + γ k ) Elk (2)
k =1  l =1 
Here k=1,…, m is the number of stages (m<n). γi>0, is the level of corruption (for exam-
ple, part of the funding at this stage, which is lost at corruption). ρi is the probability that
the innovation will remain relevant for the firm before the i-th stage (for example, it may
be the probability of leakage of information to another firm; it may be the probability
that the innovative project will be continued, etc.).
L(k) is the number of steps for strategy “d”, which for the strategy of “c” can be com-
bined in a single stage. We assume that all the stages are necessary for an innovative proj-
ect in both strategies.
Then,
∑L
k =1
k = n . (3)
There is an inequality in the general case αi>γi. The level of corruption in the strategy
of “c” is lover in contrast to the strategy of “d”. Indeed, the innovator will choose the less
transaction costs (as opposed to the university, which is less interested in the success of
innovation). δi<ρi is true for similar reason.
Note that, in the general case, δi and ρi can to depend on several factors. There are such
main factors. The first is the probability, that this product will remain relevant to market.
The second is the probability, that the innovation project will be continued. The third is
the probability that the leakage of information to another firm is absent. The fourth is the
probability that the stage is successfully ended. δi and ρi can to described as multiplication
of these factors.
Thus, it is follows from (1) and (2), (3), that the strategy “c” is dominant of strategy
“d”: Ic<Id.
Economic interpretation. Assumption 1. The government has established the country’s
environment in which the innovator has the ability to create innovation.
Thus, the both strategies – “do” and “do not” – are available for innovators.
34
Assumption 2. The Government has created the conditions in the country in which
the company can communicate with both an innovator and a university at the same time.
Thus, both strategies – “c” and “d” – are available for companies.
Taking into account assumptions 1 and 2 the following theorem can be formulated.
Theorem. If Assumptions 1 and 2 are valid, that the pair of strategies – the “c” for the
company, and “do” to the innovator – is Nash equilibrium for dynamic games of Fig. 1,
subject to sustainable economic development.
The difference of profits Δ between the strategies “c” and “d” is presented as follows,
 β n −m (δ 1 ...δ n −1 ) 
∆ = I c − I d = P0 β m ( ρ1 ...ρ m−1 ) 1 − +
 ρ1 ...ρ m−1 
. (4)
k −1  k 
m L(k )
( )
n
+ ∑ β  ∑ Pl − (1 + γ k ) El  − ∑ β [Pi − (1 + α i ) Ei ]
k i −1
k =1  l =1  i =1
From Eq. 4, it follows that Δ>0.

It is interesting that Eq. 4 allows us to calculate the benefits from introducing of the
innovation institutions, which are characteristic for developed countries.
As an example, the gap between assessment strategies “c” and “d” will be obtained
later. We will consider the case, which is characteristic for Ukraine.
Strategy “d”: the innovation, which appears in the University, consists of four phases.
In the first phase of innovation, a professor is involved in this stage (usually a relative-
ly small team working on this problem). The length of this phase is one year, because fund-
ing for the Ukrainian universities is once a year. At this stage the expenses are equal to
E1. After this stage, a report on the obtained results sent to the university administration.
In the second phase of innovation, the university administration decides to continue or not
an innovation project (with probability δ1). If the decision of the University is positive, the sec-
ond stage begins. At this stage the expenses are equal to E2. These expenses are higher than in the
first stage, so the probability of an innovation project to be continued decreases when E2 increas-
es. After this stage, a second report on the obtained results sent to the university administration.
In the third phase professor teaches the students who after graduation will produce
the innovation. The minimum time for this is one year. Professor must develop a training
plan and confirm it in the “Methodological Council of the University” in front of the
school year. Of course, the professor and his / her staff could go to work in the firm. But
in Ukraine, it is impossible, because they can’t go to university again (further outside the
University pension will be reduced). At this stage the expenses are equal to E3. The proba-
bility of success for this stage is δ2.
In the fourth phase of an innovative product will be able to produce by the company.
The probability that the product will retain its relevance in the market is δ3. At this stage
the expenses are equal to E4. Revenue P0 is only appeared at this stage.
As result, the profit Id at strategy “d” can be described as follows,
I d = β 4 (δ 1δ 2δ 3 ) P0 − (1 + α 1 ) E1 − β (1 + α 2 ) E 2 −
. (5)
− β 2 (1 + α 3 ) E3 − β 3 (1 + α 4 ) E 4
35
Strategy “c”: innovation, which develops the innovator, who does not belong to the
University, consists of four identical stages, too. However, these steps can be combined.
The first, second and third steps can be performed simultaneously. Typically, this step
is not shared more than one year. The objectives are: testing innovation to get a sample of
product and create a team to produce a prototype of the innovative product. The expenses
are E1+E2+E3.
In the next phase the innovative product will be able to make by the firm. The prob-
ability that the product will retain its relevance in the market is ρ3. The expenses are E4.
The revenue is P0.
As result, the profit Ic at strategy “c” can be described as follows,
I c = β 2 ρ1 P0 − (1 + γ 1 )(E1 + E 2 + E3 ) − β (1 + γ 2 ) E 4 . (6)
Note. The revenue P0 can only be valued at market conditions that have occurred in the
first stage of the innovation project (because they can’t fully predict.) The expenses E1, E2,
E3 and E4 are the same for both strategies.
Thus, the difference Δ of profits between strategies “c” and “d” for this case can be
estimated as follows,
 β 2δ1δ 2δ 3 
∆ = ρ1 β 2 P0 1 −  + (α1 − γ 1 ) E1 −
 ρ 
 1 
− (1 + γ 1 − β − β
α 2 )E2 − (1 + γ 1 − β 2 − β 2α 3 ) E3 − . (7)
− β (1 + γ 2 − β 2 − β α 4 ) E 4
2
Let us estimate Δ for Ukrainian conditions.

αi is the share of expenditures Ei, which the university uses as transaction expendi-
tures. These costs are the University uses to maintain its infrastructure. For example, in
Ukraine these expenses are the cost of utilities, repairs to classrooms, etc. These costs are
a loss for the innovative project. Moreover, these expenditures did not contribute to fu-
ture innovation projects.
In contrast, the costs came out of the γi, can be designed to encourage innovative
projects for the future. Innovator can create an innovative project in a separate company,
for example. Its purpose the activity may be to promote the implementation of innovative
projects for innovators.
This will be addressed in more detail below.
For the University the innovative project is exogenous, so αi is not less than the level of
corruption in Ukraine. Assess of the level of corruption in this case is ai = 0.4 (Yatsenko, 2009).
For the innovator (for a company where innovation project is carried out), these costs
are endogenous. Therefore, the estimate for γi can be made as follows γi = 0.1.
Discount factor can be estimated from the rates for deposits in Ukrainian banks, asb
= (1 + 0.15) – 1= 0.87.
The probabilities δi and ρ1 depend on the specific the innovation project. ρ1 can be
estimated as ρ1=1, because an innovator interested in the success of the project. δi can be
36
estimated as δi = 0.5 (university makes a random choice between the “continue” and “not
continue”). Of course, we expect that the innovative project is completed successfully.
Finally, the difference Δ between the strategies of profit “c” and “d” for this case can
be estimated as follows,
∆ = 0.685P0 + 0.3E1 + 0.118 E 2 − 0.04

04 E3 − 0.035 E 4 . (8)
Thus, the strategy “c” wins strategy “d” with a large difference to the economic condi-
tions that is characteristic of modern Ukraine. For Russia, the situation is not much dif-
ferent.
Equation (8) can be compared with profits for strategies “c” and “d” in this case.
I d = 0.072 P0 − 1.4 E1 − 1.222E 2 − 1.06

06 E3 − 0.092E
92 E 4 4 . (9)
0.76 P00 − 1.1(E1 + E 2 + E3 ) − 0.96E

I c = 0.76P 0.96 E 44 . (10)
It is see from (9) that for modern innovation institutions in Russian and Ukraine only
the innovations, which can to propose of extremely high profit, will be implemented.
3. Mechanism for correcting the innovation institutions in Russia and

Ukraine
Nash equilibrium of Theorem is the innovation institutions that exist in developed coun-
tries. What should be a mechanism for correction of innovation institutions that exist in Ukraine?
Note that the cases of Ukraine are differed from other developing countries at problem
of correction of innovation institutions and economic education of population. Only in
Ukraine the science and engineering were at high level. Therefore only in this case one can
to speak about correction, and only in this case this correction is only in institutional field.
Conditions for innovator. Innovator is a crucial participant in the innovation process.
It is therefore necessary to create conditions under which the innovator can produce the
innovation. In other words, the assumption 1 must be performed.
What is the position of lecturer (professor) at the universities of Russia and Ukraine?
We will show some quantitative characteristics, which are described the innovator in
universities in Ukraine. Data refer to Vinnytsia National Technical University (for other
universities in Ukraine, they are similar).
Salary (depending on the length of the work in universities) to Associate Professor
(“docent”) is in the range of $ 2400…2600 per year (after tax to pay). Food prices in Ukraine
coincided with those in the EU. The apartment is worth about $ 50,000 (2 rooms) in Vin-
nitsa. Thus, the salary of Associate Professor is spending only on food.
The number of academic hours (45 minutes per a lecture), the teacher must spend in
the classroom with students (“the classroom load”) is 800 hours for assistant professor
(“assistant” in Ukraine), 700 hours for associate professor (“docent” in Ukraine), and 600
hours for the professor (at 2016 year). May have read Professor fewer hours? Of course, yes.
But his / her salary will be reduced proportionately.
A very large number of teachers in Ukraine have taught at several universities because
of low wages.
37
Associate Professor at the same time had been taught courses above 7 to 10 by 2015 year.
In 2016 the Law of the Ministry of Science and Education of Ukraine was determined not
more than 5 courses. However every year the University always change 1–3 courses at other
new course for every teacher. Of course, the teacher imitates the teaching in these conditions.
There is no tenure in Ukraine. For example, the contract with Professor lies a period
not more than 7 years.
There is no paid vacation for scientific activities for Professor in Ukraine. In contrast,
in developed countries Professor every 5 years have paid leave to conduct research in any
university in the world.
There is no time for scientific research for teachers with such a high level of academic
hours in class. Thus, in modern Ukraine, most teachers simply imitate his / her scientific
work. Of course, under such circumstances, there is no innovation.
There are Professors who are engaged in manufacture of innovative products. There are
very few, but they are. But they can not serve as a basis for economic development. This is nec-
essary in order to participate in innovation activities that would be beneficial to the professor.
How do it? How can we make a difference?
What are conditions should be provided for professors. Of course, only for those who are
truly able to innovate (mechanism for identifying such professors will be described below).
⁃⁃ The first. Leisure time is necessary for professors to develop innovations. Number of training
hours that are spent on education in the classroom, it is necessary to reduce to the professors.
⁃⁃ The second. Resources are needed in stock to create innovative designs and technological
aspects of production. In the first the salary of professors who are developing innovations
should be increased. It should also provide conditions under which the professor operates
independently of the value, which has contributed to the innovation project.
⁃⁃ The third. The conditions are necessary for attracting people to create a prototype of innova-
tive product and technological aspects. Professor should be freedom to attract students and
other professors for developing the innovative project. Professor can give courses for which
he/she has the scientific results.
⁃⁃ The fourth. Professor must be mobile. He / she should be able to move to any city in the
country. This is necessary to integrate the innovative team that is developing innovative
products. Until now in Ukraine Professor, at best, only can be mobile within the city. He/
she is relate to the apartment, which he / she will sell in the same town and buy another.
Wages of professors and lack of infrastructure does not allow it.
Conditions for dialogue with a company and an innovator. The following condition de-
scribes the relationship between the company and an innovator. Can a company in which
the specialists are not available, effectively identify an innovator?
Thus, there is a standard problem on signaling (Mas-Collel, Whinston & Green, 1995)
in the functioning of the of innovation institutions. Professors can make a signal to com-
panies that they can produce a new product or service.
Nevertheless, in Ukraine it is not so simple. For example, there are academicians and
corresponding members of the National Academies of Sciences as a “leading scientists”
(the average age of scientists in Ukraine, more than 60 years). In accordance with a system
of certification of the Government the “Doctor of Science” has “a higher scientific level”,
unlike the Ph.D. (“Candidate of Science”).
38
However, only the professor knows his / her own abilities as an innovator. Thus, there
is a labor market with asymmetric information, which is a classical problem in the theory
of contracts. The solution to this problem is well known; it is necessary to offer individual
contracts to the applicants.
In our case, we can distinguish two types of professors: “innovator” and “simulator”.
The first type has a high performance; he / she can offer innovation. The second type (“sim-
ulator”), has low productivity, he / she is unable to offer innovations.
Marker (a signal for a company) for the innovator may be used known criteria: the
quantity of scientific papers in international peer-reviewed journals on the subject of in-
novation project, the average impact factor of journals (owing to the number of articles),
the average citation index for articles, index Hirsch and other.
These characteristics are sufficiently objective and can be used in the company. The
professor, who has a large number of these criteria, can be an indication for the company
that he / she can offer his/her innovation. Thus, the “imitators” of professors can be deter-
mined very reliably in Ukraine.
Note. The above characteristics are not able to identify talent or genius. (For example,
the problem of Poincare was solved by Grisha Perelman. His three papers on the arXive.
org website on the Internet simply could not enter into the database and index Hirsch
simply cannot be greater than 3). Nevertheless, the economy “works”, as a rule, with plenty
of recurring events. Thus, adaptation of rare events (innovation talent and genius) should
be considered under a separate task.
The professor, who has a high performance, has a greater opportunity for innovation.
And with these characteristics, the company chooses the innovator.
Economic education as an element for the correction of innovation institutions. This is espe-
cially necessary to consider the impact of the situation of economic education in Ukraine
on the performance of innovative institutions.
The system of economic education of the population is completely absent in Ukraine.
This has historical reasons. Before the collapse of the Soviet Union, the theme of economic
theses professors could, to choose one of three areas. First, capitalism (the market) is “bad”
and “worse than socialist planning”. Second, the socialist planning is the best as opposed
to “the capitalist market”. Third, there is the planning in other economic sectors (agricul-
ture, engineering, etc.).
Here it is important to note that in Alexeev et al. (1992), the “mathematical economy”
has been developed. However, these researchers only provide a way to attract this ap-
proach to the economy. The reality in today’s economy has not been investigated.
Since 1992, Ukraine have started to build a market economy (for the statements of pol-
iticians). Nevertheless, professors, analysts and experts in the market economy were absent.
In fact, people who have “scientific” results about the “inefficiency of the market
economy” cannot be experts (because they either do not understand the economy, or they
are liars). People who have “scientific proof” that the “planned economy more efficient
than the market economy”, either do not understand the economy, or liars. And planning
in some sectors of the economy in a market economy simply does not exist (and the cor-
responding “experts” are not needed).
We can expect that in 1992 in Ukraine, all the existing teachers of economics, will
remain unemployed. And their place in the university will be open to people who received
39
a master’s degree and Ph.D. in economics education at universities in developed countries.

It was easy to do: graduates in economics and young teachers of economics (under 35),
after proper screening may be sent to study in universities in developed countries. It would
have to completely rebuild the system of economic education in Ukraine in 1992–1993. And in
1995–1996, the population of Ukraine could have aware of the basic laws of market economy.
However, this did not happen. The board of the specialized councils for defending
theses in Ukraine remained unchanged. Thesis continued to defend in Ukraine, which is
a crucial differ from the market economy.
In universities Professors who had taught the “socialist economy” continued to teach
economics. They do not have the slightest idea about the functioning of a market econo-
my. Therefore, the misconception of the market economy is formed in the young genera-
tion. Politicians and civil servants make economic laws, focusing mainly on the familiar to
them “socialist economy”.
State of the economy and economic education in the former Soviet Union has been
studied by many researchers (see (Lokshin, 2009) and references therein). As in our work,
he discovered that the start, “especially the Soviet way” in science began in 1930.
For example, Lokshin (2009) writes: “In early 1930s, the Soviet Government initiated
a move to replace supposedly bourgeois methods of traditional economics with the political
economy of socialism. This change caused Soviet social scientists to reject the scientific method.
The system of political economy was based on the conceptual framework of so-called “histor-
ical materialism”, which emphasized descriptive research ... The paramount task of the Soviet
economics was to provide a scientific basis for the policies of the Soviet Communist Party”.
Thus, today, people who participate in the economic life of Ukraine do not know the
mechanisms of market economy. Consequently, they cannot choose effective technologies
for the work; they cannot predict their lives and their future. There is a growing public dis-
content with the existing “status quo”. But “how to live” – no one knows, neither men nor
politicians nor the experts. Public managers, entrepreneurs and company managers are
not aware of modern economics and modern management. Thus, they have no knowledge
(and, especially skills) for innovation and for their involvement in innovative institutions.
Description of the mechanism. The mechanism for correction of the innovation institu-
tions in Ukraine can be shortly described as follows.
1. At the level of University.
University must pay for the scientific activity of Professor. For example, it may be
a premium for the publication of articles in foreign scientific journals. These allowances
are desirable to differentiate in depending on the scientific rating of journals. The value of
premium should be more for the wage of professor: scientific activity for Professor will be
promoted only in this case.
Thus, Professor can make a choice between scientific work and teaching.
2. At the level of company.
Company should be able to spend a part of their revenue to pay for the development of
innovations. At the same time, these costs should not be taxed: only under this condition
the company would benefit from such activities. Note that the company will be profitable
to finance only those innovative projects that will benefit: that is, the mechanism of self-
-organization will work. Of course, the Government must to build the needed conditions.
40
It is interesting that company can finance a separate structure, but not a university.
In this structure, a professor can work outside the university. Thus, in Russia and Ukraine
would be established new incentives to universities for involving in innovative activities.
3. At the level of Government.
Government must enact laws for universities and companies that provide the neces-
sary conditions.
4. At the level of institutions.
Government must encourage the development of economic education of population.
First of all, the emergence of the modern courses in economics should be encouraged. Pu-
blication of books describing the modern economy (and research, and focused on a wide
range of readers) should be encouraged, too.
4. Empirical evidence for Ukraine (and comparative with Russia)

Companies will not fund every innovation project. They will choose only innovation of
scientists who successfully made it clear that they are able to get a result at the world level.
The situation in Ukraine will be discussed in detail below. For Russia, the situation is
not much different from the Ukraine (but it requires a separate empirical study).
For example, data on publications of Ukrainian universities, which are available in the
database at 12/27/2011 Scopus (National Library of Ukraine named V.I. Vernadsky, 2011).
Unfortunately, the situation in 2016 did not change significantly. This database is informa-
tive enough to signal to innovation. The journals from this database cover the main areas
of innovation. However, it should be noted that data from Scopus also includes articles
that were published in Russian and Ukrainian scientific journals (if they have been trans-
lated into English), as well as conference proceedings (in which scientists from Russia and
Ukraine do not come often.) Thus, in reality, the situation is much worse.
It is shown from (National Library of Ukraine named V.I. Vernadsky, 2011) that only
11 universities have more than one thousand publications. 49 universities from 97 (more
than half) have less than 100 publications, 8 of them – less than 10 publications. Note that
the history of the university dates back several decades.
In economics, the situation is more tragic. Tom Coupé (2008) investigated the quan-
titative contribution of Ukrainian economists in the world economy. His empirical re-
sults are as follows: “A total of 86 Ukrainians published in journals that are indexed in
EconLit in the period 1969–2005. They together contributed to 121 articles. If we attribute
coauthorship proportionally, 92 papers have been written by these Ukrainian authors.
Note in this list of 86 we do not only have academics, we also have politicians like former
Prime Minister Yekhanurov and President Yuchenko. Moreover, remember that our initial
search in EconLit gave us 229 publications related to Ukraine – since these 121 articles in-
clude several articles that are on subjects unrelated to Ukraine, most of the international
research on Ukraine has been done by foreign researchers”.
Today, the situation with the number of publications in international journals is im-
proving, but not at the expense of economists who work in Ukraine. In (Coupé, 2008)
noted: “The more recent publications are typically written by Ukrainian economists with
a Western Ph.D. degree, and not by economists with a Ukrainian Candidate or Doctoral
Degree. That things are improving is hence mainly due to the fact that the number of
41
Ukrainians with Ph.D.s is increasing – at least 35 Ukrainians graduated with a Ph.D. from
a Western University since 1995”.
The reasons why there is such a situation are well described in (Coupé, 2008). These
reasons remain valid today.
Thus, today in Ukraine is not the professors who can teach people even basic operation
of a modern market economy. Therefore, innovative institutions remain state of crisis today.
In Russia conditions are identical to Ukrainian.
Lokshin (2009) studied the economic state of publishing in Russia on the base of pov-
erty between 1992 and 2006. He identifies the following main results of his research: “Our
findings indicate that only a small proportion of papers on poverty published in Russia in
1992–2006 follow the universally recognized principles of the scientific method. The util-
ity of policy advice based on such research is questionable”. He stresses that contribute to
the economy of the Russian economists are very few: “Judging by the number of references
to international sources, Russian poverty scientists are barely, if at all integrated into the
world research community”.
In (Lokshin, 2009) found that «none of the journals from our sample employ dou-
ble-blinded peer review process used by many international journals in the selecting and
screening articles for publications». He emphasized: «Policymakers have no means to dis-
tinguish the work of inferior quality from high quality studies».
Kornai (2010) explores the relationship between capitalism and technological prog-
ress. He drew attention to the fact that innovations in all areas (except military) are pro-
duced in countries with market economies.
However, he stressed that Hungary has not yet paid sufficient attention to the teach-
ing of economics: “Yet the usual syllabus of microeconomics does not enlighten students
on this important virtue of capitalism, neither it is not adequately emphasized in the
statements of leading politicians". He writes: “Nevertheless, these valuable ideas do not
penetrate, via courses on microeconomics, to the routine education of young economists”.
But economic education in Hungary is very high in comparison with Russia and Ukraine.
In (Tiffin, 2006), the loss of Ukraine from weak institutions is investigated. It is con-
cluded: “In quantifying the benefits of market-friendly institutional reform, our results
suggest that durable growth in Ukraine will depend critically on the authorities’ ability to
secure the foundations of a modern market economy”.
The conditions for learning to work in a modern market economy must be created for
the population in Russia and Ukraine. Obviously, it is essential not only for the effective
operation of innovative institutions, but also to build a developed economy as a whole
(Shiyan, 2009). Options for mechanisms to implement these conditions have been devel-
oped in (Shiyan, 2011).
A key element in the mechanism of correction of innovation institutions in Ukraine is
a system of higher economic education (see above). It is the availability of relevant devel-
opments in this area can be considered as characteristic for the success of such a correction.
The population of participants in innovation institutions must obtain the necessary
knowledge on the functioning of modern market economy. This can be achieved only
when every economic department will be at least one professor who has published in in-
ternational journals. And besides, he should be able to incorporate its results into courses,
which he lectured.
42
International relations in the field of economic education and research in economics

may play a crucial role to achieve the effect.
Taylor (2009) notes “that international linkages may be the missing piece to the na-
tional innovation rate puzzle”. Taylor (2009) listed a set of international relations, which
“are important for explaining differences in national innovation rates”. New international
relations can be added to the Taylor’s list from the results of our work. This will help
Russia and Ukraine to use experiences of developed countries in the formation of modern
economic education in their universities. As shown above, this is an important factor for
building effective domestic institutions of innovation.
Lokshin (2009) also argues that “International cooperation plays a critical role in the
development of economic research... A large, well-documented body of open knowledge
generated by modern economics is within the reach of anyone willing to apply it. Russian
poverty economists simply have no choice: either they become part of the international
scientific community, or poverty research in Russia remains a substandard, isolated activ-
ity without much useful output”.
We present some empirical data to analyze the differences between Russia and Ukraine
in the system of economic education. These differences are quite small, but they will increase
over time. For Russia exactly the international politics has a key role, in contrast to Ukraine.
There are some universities where graduates receive a degree in economics in Russia.
The main players are the two universities.
New Economic School (NES) was established in 1992 (NES info ENG, 2011). The result
of this activity (NES info ENG, 2011) is: “The majority of NES graduates are working in
the Russian and international companies and Russian government authority (including
Arkady Dvorkovich, NES’94, Assistant to the President of Russia)”. Today, professors in
the NES are employed in the international market. NES professors are leaders in many
universities in Russia at the scientific level.
National Research University Higher School of Economics (NRU HSE) was formed in
1997 (NRU HSE, 2011). “13 foreign teachers were recruited to work in the HSE as a result
of competition in 2010. The number of full-time teachers of the HSE, with a Ph.D. from
leading foreign universities has increased to 43”. (Results of implementation, 2011). NRU
HSE uses financial incentives to publish research papers in international journals. For ex-
ample, in 2011, this bonus will be paid monthly, issued for 2 years: it is generally more than
46 thousand U.S. dollars (Academic bonuses at NRU HSE, 2011).
NES graduates annually approximately 100 masters of the economy. NRU HSE annu-
ally graduated nearly 1,000 masters and experts, and nearly 1,500 bachelors (NRU HSE,
2011). Thus, these two universities have the largest impact on the population of Russia.
Annually, today more than 2,500 people, who are well acquainted with the functioning of
modern market economy, ready to enter the labor market in Russia. For 15 years, many
graduates from these two universities have taken a leading position in the company as the
managers of the economy in Russia.
Many NES professors have written columns of Economic Review in the leading news-
papers in Russia for many years. Since 2010, NES professors put their lectures to the gener-
al public on the Internet. All this leads to a rather rapid rise of “economic literacy” of the
Russian population. Many textbooks on modern economy and management are published
at NRU HSE for many years.
43
Of course, there are still a few players, such as the European University at St. Pe-
tersburg, or, as the Faculty of Economics, Novosibirsk State University. Their number
increases with time.
Lokshin (2009), as in our work, noted that in Russia there are only a few universities
that can be compared with the universities of developed countries, which are integrated
into the world of science.
In particular, he writes: «Researchers from several economic institutions, such as the
Center for Economic and Finance Research at the New Economic School and various sci-
entific research centers at the Higher School of Economics, as well as others publish their
work in leading international economic journals».
In Ukraine the situation is much worse: there is only one university where the student
can learn a modern market economy. Since 1996, the Kyiv School of Economics (KSE) has
462 graduated students (KSE information, 2011). KSE was founded by the Economic Re-
search and Education (EERC) and the Victor Pinchuk Foundation. KSE has no influence
in Ukraine, but their professors regularly publish popular articles in newspapers. KSE do
not to publish any books in modern economy.
Moreover, the first textbook in game theory and it applications to economy and man-
agement was probably published in Ukraine in 2011 in the number of 75 copies (Shiyan, 2011,
Management for). The corresponding two courses were probably taught only in Vinnitsia
National technical University amongst Ukrainian Universities (except KSE, of course). But
these two courses can not to prepare of the students for activity in modern market economy.
Thus, there are substantial differences in access of the population of Russia and
Ukraine to information about the market economy. Ukraine lags behind Russia in this
direction for quite a long period of time. Today is not planned to create a university in
Ukraine, which is similar to the National Research University Higher School of Econom-
ics. Moreover, the President, the Prime Minister, Minister of Education and other senior
government officials say only about the “overabundance” of economists in Ukraine. Per-
haps in the near future in Ukraine should not expect a change for the better.
The following fact is important to note. Both NES in Russia and KSE in Ukraine have
been created for the programs of Master of Economics and with the direct involvement of
international organizations. Moreover, the first few years, they were financed by interna-
tional funds. This is crucial for the existence of these universities.
In addition, international funds provide direct financial assistance in the training of
professors from other universities. However, this support for the professors of Ukrainian
universities was not enough.
Perhaps today the international financing of programs for teaching professors (usu-
ally young, 35–40 years) and the establishment of training courses on the modern market
economy will be crucial for Ukraine’s transition to a developed economy (and the institu-
tions in the developed innovation).
We think that there may be true (Taylor, 2009): “I also acknowledge that much more
work needs to be done to resolve the interplay between domestic institutions and their
international linkages”.
For the process of formation of higher economic education in Russia and Ukraine,
international relations played a crucial role. Especially for the international relations of
Russia played a greater extent compared with the Ukraine. It was probably for this reason
44
that Russia is now implementing a project “Skolkovo”, while Ukraine says “about over-
abundance” of economists.
This observation of (Taylor, 2009) is also true: “Therefore the key research question is
not which institutions or linkages are employed, but what are the politics behind a coun-
try’s pursuit of innovation and its strategy by which to achieve it (i.e., the selection of its
institutions and linkages)”. In our case, for Ukraine’s future is very important, as will be
selected domestic politics and policy, which will be selected foreign countries.
We believe that success for Ukraine can be achieved provided that the two policies
(one international and one domestic) will be chosen optimally.
International politics is the desire to support Ukrainian professors to develop new co-
urses that meet international standards. Trust fund may be used, especially for economic
policies that require the most significant changes.
Domestic policy must change the existing institutions of higher education. Directions
for the implementation of such changes have been described previously in this article.
Conclusion
The modern innovation institutions had been created in the 1920s and early 1930s
in Ukraine. The main goal for this institutions creation is in separation function of “old”
professors and new “proletarian engineers”. Today these innovation institutions can not
to effectively work.
The game model for description of innovation institutions working in modern Ukra-
ine is constructed. The conditions, which are needed for creating of effective innovation
institutions, are obtained from the model of this paper.
The mechanism for correcting the innovation institutions in Ukraine is described.
This mechanism follows from the game model. The necessary conditions for the innova-
tor including: increasing both of the leisure time and the salary, increasing both of the
freedom to attract students and mobility for professors. The necessary conditions for the
company are required of the signaling from professors. As markers for signaling can be
the quantity of scientific papers in international peer-reviewed journals on the subject of
innovation project, the average impact factor of journals (owing to the number of arti-
cles), the average citation index for articles, index Hirsch and other. It is shown that the
economic education is the main element for correction of innovation institutions.
It is shown that the signaling from the innovators is differed between Russia and
Ukraine. While the signaling from Ukrainian innovators is very weak, the signaling from
Russian innovators is stronger. The main difference between Russia and Ukraine is in eco-
nomical education. The international relations can be played the crucial role in increasing
of level of economical education for modern Ukraine. Both international and domestic
politics must be used for achievement of effect.
45
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47
Chapter 3.
FEATURES OF MANAGEMENT PRODUCTION
PROCESSES IN THE CONDITIONS OF
VAGUENESS OF EXTERNAL ENVIRONMENT
Konstantin Pavlov, Abbas Mardani, Nataliia Mamontenko,
Iryna Hanzhurenko
D ue to the fact that at present the complexity of production processes has imme-
asurably increased, the problem of finding effective management methods and
ensuring the sustainable operation of enterprises has become extremely complicated. In
the conditions of the transition period, when the instability and volatility of the organi-
zational and economic environment have significantly increased, the issues of managing
socio-economic forecasting naturally come to the fore. In our opinion, it is advisable to
consider some areas of management and management of enterprises in the transition to
the market, taking into account the critical analysis of foreign experience. Thus, a number
of researchers identify several stages in the development of systems of general corporate
management abroad (Ansoff, 1989). Such stages include performance-based management,
extrapolation-based management, change-based management, and flexible emergency so-
lutions management, which are currently being developed, in conditions where many dif-
ficulties arise so unexpectedly that they can not be foreseen.
The complication of production processes and the growing instability of the organiza-
tional and economic environment lead to the need to develop a solution already when re-
latively weak signals from the external environment arrive. Therefore, in the new economic
conditions immeasurably increase the role and importance of planning and forecasting, but
not the kind of planning, which operated under the socialist mode of production. The inhe-
rent properties of inertia, the transfer of existing trends and management conditions to the
future, etc., not only make it impossible to apply this form of planning in full at the present
time, but also are one of the most important reasons for the low effectiveness of the socialist
economy. Due to the need to adapt the existing control to a qualitatively new conditions,
to make it more flexible system and labile, in the developed capitalist countries use some
form of planning. In the long-term planning system, it is assumed that the future can be
predicted by extrapolating historically developed growth trends. In the system of strategic
planning, it is not considered that the future can be studied by extrapolation (Ansoff, 1989).
Here, in the beginning, an analysis of the company’s prospects is undertaken, during which
the trends, the chances of the firm, and individual emergencies that are capable of changing
the current trends are examined. The next stage is to study the positions in the competition.
At the stage, which has received the name of the strategy selection method, the company’s
perspectives in different types of activities are compared, priorities are established and re-
sources are allocated between different activities to ensure the future strategy.
Thus, strategic planning is understood as the managerial process of creating and main-
taining a strategic correspondence between the objectives of the firm, its potential oppor-
tunities and market opportunities (Kotler, 1990). Further detailed plans are developed for
individual types of production and the release of specific goods and branded products, which
is generally referred to as marketing planning. There are also tactical, operational, etc. forms
of management and planning. The presence of various forms, types and methods of planning
and management, in our opinion, is a clear example of an attempt to adapt to the uncertainty
of the economic environment, to the growing complexity and instability of social processes.
The transition to market relations of the Russian economy, the numerous mistakes
that arise as a result of ill-considered and the absence of an integral, deeply developed,
logical concept of this transition also lead to an increase in the instability of the organi-
zational and economic environment. All this, on the one hand, makes it impossible to use
the rigidly centralized, directive form of planning and management of production that
was characteristic of the socialist period of development, on the other hand, extremely ac-
tualizes the search for new forms and methods of management and planning, for, as world
experience proves, Without using certain options for the implementation of management
processes, modern production is simply impossible. In this regard, for Russian enterprises
at present, in order to increase the efficiency of their production activities, it is advisable
to use certain elements characteristic of the management system of Western firms.
First of all, in our opinion, we should abandon the attempt to carry out comprehen-
sive planning of all aspects of the production and social activities of the enterprise col-
lective and concentrate on solving the most important problems. In this connection, we
note that in order to cope and master the rapidly changing situation in the market, in the
developed capitalist countries, the principle of timely decisions is adopted in the manage-
ment system of firms. In this so-called management by ranking strategic tasks, senior ma-
nagement along with the planned service of the firm divides all tasks into four categories:
a) the most urgent and important tasks that require immediate consideration;
b) important tasks of medium urgency, which can be solved within the next planned cycle;
c) important but non-urgent tasks requiring continuous monitoring;
d) tasks representing a false alarm and not worthy of further consideration (Ansoff, 1989).
This approach is very effective, and therefore its use as the basis for building a manage-
ment system for Russian enterprises under modern conditions seems timely and necessary.
Further, instead of drawing up a detailed plan, we should confine ourselves to develo-
ping a strategy for the development of the enterprise, for, again, experience of developed
countries shows that strategy is precisely the tool that can seriously help a company that has
found itself in conditions of instability. Here we mean strategy as a set of rules for decision-
-making, which guide the organization in its activities. Since the company’s development
strategy can change depending on the current situation in the macro- and microsphere
company, it is advisable to develop a strategy for the future and its more detailed version in
the near future, and make periodic adjustments to the strategy in accordance with the place
in the organizational and economic environment changes. Moreover, the concrete value of
the time interval of the perspective period for which the strategy is being developed should
50
Konstantin Pavlov, Abbas Mardani, Nataliia Mamontenko, Iryna Hanzhurenko
Chapter 3. FEATURES OF MANAGEMENT PRODUCTION PROCESSES IN THE CONDITIONS OF VAGUENESS OF EXTERNAL...
be determined by the enterprise itself based on its capabilities and needs. However, given
the extremely high level of instability in the current economic situation in our country, it
seems that the significance of the time period should not be significant (a year for a strate-
gy for the future and a quarter for developing a more detailed version). But once again, we
emphasize that these values are recommendatory in nature, the choice is for the enterprise.
Similarly, the principles of strategy development should be implemented by the enterpri-
se itself, but it is possible to recommend, in accordance with the achievements of the foreign
management theory, special attention to such aspects of production activity as prospects for
further growth, profitability and strategic vulnerability of the firm (Ansoff, 1989). In this re-
gard, it seems useful to implement the process of managing Russian enterprises in modern con-
ditions to use certain provisions of the theory of marketing, taking into account the fact that
the Russian market is currently far from the degree of development characteristic of the mar-
ket of advanced capitalist countries, moreover, the Russian market is mostly deficient market.
Some of the most prominent theoreticians correctly point out that marketing is not
just advertising and the activity of the staff of sellers; it is rather a comprehensive process
of adaptation to the use of the most profitable of the emerging market opportunities (Ko-
tler, 1990). In accordance with the achievements of the theory, the process of marketing
management consists of:
1. analysis of market opportunities;
2. selection of target markets;
3. developing a marketing mix;
4. the implementation of marketing activities.
At the present time, when the independence of Russian enterprises has immeasurably
increased, it is advisable to use many methods of marketing management in our country. This
is primarily the study and forecasting of demand, segmenting the market, selecting the target
market segments and positioning the product on the market. However, it should be borne in
mind that two aspects intersect and complement each other in time-based marketing: on the
one hand, it is a comprehensive study of the market, demand and needs, and the orientation
of production on these requirements; on the other – active influence on the market and the
existing demand, on the formation of needs and consumer preferences (Evans & Berman,
1990). Therefore, the second aspect should also be given enough attention. Thus, we should not
confine ourselves to studying the market and demand, we should actively form this demand
as far as possible, and, in our opinion, in a deficit market is immeasurably easier to carry out.
When studying the marketing capabilities of an enterprise in the methodological plan,
it is advisable to distinguish controlled and uncontrolled factors of the marketing environ-
ment (Evans & Berman, 1990) and, with this in mind, start developing a strategy for the
development of the firm. In the very process of implementing the strategy planning, five
stages can be distinguished in accordance with the recommendations of foreign scientists:
1. the formation of a ranked complex of problems;
2. planning goals;
3. planning of means to achieve goals;
4. resource planning;
5. design of implementation and monitoring (Akoff, 1985).
51
Of course, all these proposals are recommendatory in nature, the management of the
enterprise itself must decide, in accordance with its capabilities and needs, which of them
should be used. Moreover, depending on the specifics of production activities, the package
of proposals can vary significantly. So, it is clear that the need for high-quality marketing
from companies currently carrying out mainly foreign economic activities is very high.
Thus, we can state that a qualitatively new level of uncertainty, instability and va-
riability of the organizational and economic environment, a high level of complexity of
production processes require a radical revision of the paradigm, management and plan-
ning philosophy, and the search for new methods and methods for managing economic
processes. Given these circumstances, as well as the limited capabilities of individuals
conducting administrative operations abroad in the developed capitalist countries adhere
to the concept of so-called incremental planning, when instead of trying to find the opti-
mal parameters of the system, they adhere to the position of limited rationality, deter-
mining the mode of action that is good enough to produce a reasonable improvement in
the current state of the system (Saagi & Kerne, 1991). In this regard, and for the effective
implementation of the Russian business management process in the transition to a market
expedient adhere to the concept of flexible indicative planning using elements of different
approaches to managing, forecasting and planning of production, including the concepts
of strategic, systemic regulatory scheduling and so on. (a classic example of flexibility is
the use of the developed capitalist countries in the practice strategic planning and fore-
casting matrix firm development opportunities for products / markets, the matrix “East
Consulting Group”, and other similar methods). And it is important to emphasize that the
effectiveness of using various methods of managing production processes is largely deter-
mined by the interaction of all elements of the economic management system at different
levels of the hierarchy: national, sectoral, regional, at the level of the main economic link.
Only in this way, in our opinion, it is possible with a sufficient degree of reliability to
manage the production process in such an unstable economic environment and to create
conditions for natural transformation and an optimal balance of subjective and objective
factors, conscious and spontaneous forms of regulation, planned and market management
methods and management. On the other hand, consideration and analysis of methods of
managing production processes allow us to concretize the provisions of the concept of the
optimal correlation of market and state regulators.
One of the most important conditions for the effective management of complex pro-
duction in the new business environment is the choice of a rational structure and form
of organization. In this regard, considerable interest in foreign studies, which analyze the
activities of the various types of organization. Thus, some researchers distinguish between
a mechanical model (linear-functional control structure) and an organic model (design,
program-target, matrix management structure) (Milner, 1978). It was noted that both ty-
pes of organization can co-exist at the same time (even in different parts of the same firm)
and be effective in different conditions, contrary to the claim that the mechanical model
is an outdated and outdated type of organization. In this connection, the actually observed
increase in the number of organic structures is due only to an increase in the instability
of the operating conditions of the firm and their desire to adapt to new requirements,
but since instability varies in different regions and industries, the growth of structures
of this type is uneven. The problem of choosing a rational structure and organization of
52
production involves the process of finding the optimal level of centralization. A number
of economists note that both the excessively high level of centralization and the excessive
decentralization of the enterprise’s activities lead to negative consequences and negatively
affect the efficiency of production (Ober-Kree, 1973). This position fully confirms the sad
experience of the development of the Soviet economy and the consequences brought abo-
ut by gigantomania, the desire for excessive concentration and centralization of produc-
tion in the past, socialist period. It is necessary, as already noted, the optimal relationship
between the opposite processes of centralization and decentralization.
To avoid negative consequences, one should not, as they say, go to extremes, but we
must try to find a rational relationship between the opposite processes of centralization
and decentralization, and depending on the state of the external environment, the ne-
cessary level of centralization will also change. In this regard, we note that the high level
of instability in the economic space has led to the search for new forms of adaptation of
production systems to new business conditions. For example, a number of construction
organizations in the Murmansk region left the territorial construction association in 1991,
which, in our opinion, is an example of adaptation to new conditions.
One of the promising directions for seeking new forms of production organization
is the process of diversification. There are several varieties of diversification: concentric,
horizontal and conglomerate diversification. Diversification is one of the forms of ensuring
the stability of enterprises with a strong variability of the organizational and economic
environment. In developed capitalist countries, the diversification of production is very
widespread in completely different sectors, and to a large extent it is connected with it by
the explanation of the reasons for the financial stability of large corporations. Recently,
the process of diversification has been further developed in the Russian economy, which is
especially characteristic of enterprises whose products are not classified as scarce and do not
enjoy a high demand in the market. And often in such enterprises there is a conglomerate
variety of diversification, that is, when the existing assortment is replenished with products
that have nothing to do with either the technology used in the enterprise or the current
products. This happens, for example, when in the enterprises of the basic industries they
start producing such products that are unusual for them as consumer goods. On the one
hand, this method of survival helps to reduce the deficit of a certain group of goods neces-
sary for society, on the other hand, it is often carried out in a very inefficient way, since the
enterprise has neither the relevant work experience nor a sufficiently developed technology.
As we see, the existing forms and methods of adaptation to the growth of instability
and volatility of the economic environment can lead to a contradiction between the inte-
rests of society and the interests of the enterprise. Therefore, the problem of finding an ef-
fective management option can not be limited to an analysis of the possibility of applying
various progressive methods of management at the enterprise level, but is directly related
to the creation at the different hierarchy levels of rational economic and organizational-
-legal conditions. So, it is clear that no matter what progressive methods are used in the
enterprise management system, the effect from them can be small if the conditions of the
external environment do not contribute to the normal course of the production process
(for example, excessive taxes are set, the legal base is not sufficiently prepared, etc.). In this
regard, in order to improve the stability and sustainability of production processes in a pe-
riod of transition to market relations, the implementation of a system of measures of state
53
regulation and management of the national economy becomes particularly important. It is

the state, in our opinion, in the conditions of increased instability, should develop a system
of measures to support certain types of production through the development of a rational
tax, credit and financial policies, the creation of all sorts of stabilization funds, the prepa-
ration of a solid legal framework. Without this, the use of the most progressive manage-
ment methods can have absolutely no effect. Moreover, forms and methods of state regu-
lation used in various sectors and spheres of economy must take into account sectoral and
regional specifics. Thus, state enterprises in capitalist countries often use not indicative, as
in the private sector, and directive planning (Shchukin, 1992). An important component
of the development of the company’s development strategy is to assess the operational
efficiency now and in the future. Among the researchers there are many approaches to the
selection of criteria and performance indicators. Thus, D.S. Sink believes that there are at
least seven different, but not necessarily mutually exclusive criteria for the effectiveness of
the organizational system, to which he refers the following: 1) effectiveness; 2) economy; 3)
quality; 4) profitability (income / expenses); 5) productivity; 6) quality of working life; 7)
introduction of innovations (Sink, 1989). There are other points of view, and a very impor-
tant aspect of disagreement is the dispute about the possibility of the existence of a general
and integral indicator of effectiveness or the need for using this set of indicators. Without
attempting to comprehensively analyze the problem, it should be noted that, as experience
of management and management shows, it is not possible to evaluate the efficiency of the
enterprise’s production activity on the basis of only one indicator, however, on the other
hand, the use of a significant group of indicators, as a rule, leads to contradictory estimates
(for one indicator, efficiency is increasing, others are decreasing), and it does not allow to
concentrate the attention of management personnel on the main aspects of activity. In this
regard, it is necessary to rank indicators and performance criteria and, based on identified
priorities, to evaluate it. In our view, the estimation of profitability and productivity in-
dicators is of the utmost importance for Russian enterprises, and if we take into account
not only the interests of the enterprise itself, but also society, we need to add indicators
of innovation and quality evaluation to these three groups. Moreover, we note that it is
possible to measure the data of a group of indicators in different ways, the choice of this or
that option should be carried out by the enterprise itself.
In connection with the instability and volatility of the organizational and economic
environment, the degree of risk significantly increases when making managerial decisions.
It should be noted that the problem of risk in various aspects – economic, legal, psycholo-
gical, etc. – has long been discussed in the special literature of the capitalist countries. So,
even J.M. Keynes wrote about the “risk costs”, which are necessary to cover the possible
deviation of the actual revenue from the expected (Keynes, 2007). He believed that it is
advisable to take into account the three main types of risk in economic life: 1) the risk of
an entrepreneur or a borrower; 2) the risk of the lender and 3) the risk associated with
a possible reduction in the value of the monetary unit.
And in the Russian economy, the importance of risk as one of the elements in the de-
cision-making system has increased immeasurably lately. A number of researchers identify
certain points that are specific to the economic aspect of risk (Algin, 1989). In economics,
the risk is identified with the possible material damage associated with the implementa-
tion of a solution, with accidents, natural disasters, bankruptcy of enterprises, a reduction
54
in the value of a monetary unit, and so on. Since, as a rule, the probability of making a deci-
sion is not equal to one, and in the conditions of instability, the possibility of implementing
a decision becomes even more uncertain, it is necessary to provide in the economic mecha-
nism certain forms of compensation for risk, and the less the probability of implementing
a solution, the other things being equal should be higher and the level of compensation. In
reality, this can be done by differentiating the rate of bank interest, the level of taxes, etc.
It is also important to take into account the time aspect of the economic risk assessment.
Thus, in the context of the increased variability of the organizational and economic
environment, the implementation of production activities is significantly complicated,
the degree of risk increases, which leads to the need to search for non-standard solutions
and implement new methods for managing socio-economic processes.
The fact that there is currently an increase in instability of the working environment,
noted by many authors. Thus, I. Ansoff (1989), analyzing the instability of the conditions
of entrepreneurial activity in the United States, distinguished several successive stages of
its growth throughout the twentieth century. The increase of the uncertainty of econo-
mic processes flow manifests itself in a variety of ways, and multi-variant development,
increasing influence of STP on the development of society, the dynamic emergence of
fundamentally new tasks and so on. But we emphasize that the growth of instability is not
unambiguous, but only on the average, in the form of a trend.
After the socialist period of the development of the Soviet economy was over, typified
by almost absolute certainty and predictability of the total production process, there has
come a stage in its development, when the uncertainty of economic phenomena has incre-
ased exceptionally. One gets the impression that all the uncertainty that was artificially
suppressed under the conditions of socialism, now that there are no such restrictions,
has escaped what is called outward, in such a strong form that its level may exceed thre-
shold, critical values, threatening catastrophe and chaos. In this regard, it is legitimate to
recall the previously stated hypothesis that any socio-economic processes (and possibly,
in general, any processes) have a certain, minimally necessary level of uncertainty, and if
conditions are created under which the actual level is still less this necessary minimum
(which means that there are no conditions for the normal course of these processes), there
is a cumulative increase in uncertainty, terminating with the obligatory destruction of the
normal conditions of development.
One of the forms of manifestation of uncertainty in the economy is the choice of
the criterion for assessing effectiveness in the face of a variety of options for solving the
problem. One of the many examples is the problem of choosing two different strategies of
entrepreneurial behavior, one of which is aimed at the earliest possible obtaining of the
total maximum profit for a rather long period. To solve these problems, multicriterion
optimization methods are used, such as the Pareto optimization method, etc. One of the
most difficult problems of entrepreneurial activity is the choice of the optimal investment
option. In this case the entrepreneur faces different varieties of uncertainties, in their
totality they form the so-called critical uncertainty, under which the risk element takes
effect (Algin, 1989). Therefore, in this case there is not an easy task – given the market
conditions and the impact of other factors to determine the degree of risk.
Thus, the management of production processes in conditions of a qualitatively higher
level of uncertainty and variability of the organizational and economic environment must
55
occur in a fundamentally different form and be implemented by other methods. In this

regard, it is appropriate to use in the Russian economy of a number of approaches that
have proved effective in the implementation of capitalist firms management. Of course,
this should happen not through the absolute copying of foreign experience, but taking
into account the specifics of the functioning of the Soviet economy at present and in the
past. Here especially noteworthy flexible system of various development planning and
forecasting models of the company, certain aspects of the marketing management process,
taking into account in economic practice, the degree of risk, and so on. The introduction
of such methods in the Russian economy will make it possible to increase the efficiency of
the production management system in the new economic conditions.
References:
Akoff, R.L. (1985). Planning of the future of the corporation. Trans. from English. Moscow, Russia: Progress.
Algin, A.P. (1989). Risk and its role in public life. Moscow, Russia: Thought.
Ansoff, I. (1989). Strategic Management. Trans. from English. Moscow, Russia: Economics.
Evans, J. & Berman, B. (1990). Marketing. Trans. from English. Moscow, Russia: Economics.
Keynes, J.M. (2007). The general theory of employment, interest and money. Trans. from English.
Moscow, Russia: Eksmo.
Kotler, F. (1990). Fundamentals of Marketing. Trans. from English. Moscow, Russia: Progress.
Milner, B.Z. (1978). American budgetary management theories. Moscow, Russia: Thought.
Ober-Kree, J. (1973). Enterprise Management. Trans. from French. Moscow, Russia: Progress.
Saagi, T. & Kerne, K. (1991). Analytical planning. Organization of systems. Trans. from English.
Moscow, Russia: Radio and Communication.
Shchukin, B.N. (1992). Indicative plan as an organizational mechanism for the implementation
of the state’s economic policy. State regulation of market economy, (n.d.), 13–20.
Sink, D.S. (1989). Performance management: planning, measurement and evaluation, monitoring and
improvement. Trans. from English. Moscow, Russia: Progress.
56
Chapter 4.
SOCIAL-ECONOMIC AND ENVIRONMENTAL
SUSTAINABILITY OF REFORM: INDICATORS
AND METHODS OF EVALUATION
Konstantin Pavlov, Oleg Zakharchenko, Norhayati Zakuan,
Sergii Kolodynskyi
S ocio-economic reform, aimed at the formation of a developed market environ-

ment in many former socialist countries, including Russia, largely does not justify
the expectations. The post-socialist economy of a number of countries is experiencing
an acute crisis, manifested in a significant decline in production, in lowering the living
standard of the working people, in increasing unemployment, impoverishing the masses,
worsening the ecological situation, But the most important negative consequence of the
reforms, based on monetarist principles, is, in our view, a reduction in the level of inten-
sification of social reproduction, which, as we know, is the material basis for increasing
economic and environmental efficiency. Given the long-term nature of the consequences
of this kind of negative trend, and also the fact that it indicates a growing lag in the scien-
tific and technical potential of the Russian economy from the world level, it is possible to
reasonably forecast further decline in production efficiency and worsening of the socio-
economic situation in the country.
All this testifies to the need for a serious correction of the strategy of the reforms
being implemented, and therefore the urgency of developing the problem of the sustaina-
bility of the reform becomes more obvious (Pavlov, 2009). What should be understood by
the stability of socio-economic transformations in society?
In this regard, it should first be noted that, as a rule, the cardinal transformation of
the social system is very painful, which is manifested, as already noted, in the growth of
unemployment, a decline in the standard of living, etc. However, sometimes these nega-
tive aspects in the implementation of Reformation transformation are not of long-term
nature, and after a certain period of time occurs stabilization and recovery. In this case, it
is obvious that socio-economic transformations aimed at the growth of social welfare, are,
in the final analysis, sustainable, despite a certain temporary decline in the standard of
living. If, however, the level of life continues to fall after a sufficiently long period of time,
and stabilization does not come about anyway, then it is obviously not necessary to speak
about the sustainable nature of the reform (in this connection, it is very urgent to work
out the problem of maximizing the longest possible decrease in the standard of living.
Thus, analyzing the stability of radical socio-economic transformations, the stability

of reform, first of all, it is necessary to distinguish the time aspect (Zhemchuzhnikova,
Tolkushkin, Kravchenko et al., 1989). This means that when analyzing this problem, it is
necessary to consider a sufficiently long time interval, for only then will it be seen how
much the reform is stable. Considering, that reform is not important in and of itself, but
primarily from the point of view of the influence of transformational transformations on
socio-economic and ecological efficiency, an analysis of the question of the sustainability
of reform can to a large extent be reduced to an analysis of the problem of the influence of
reform reforms on the sustainability of the functioning of social systems, on their efficien-
cy. It is clear that in this connection, when studying the problem of the sustainability of
reform, it is important to choose a system of indicators on the basis of which it is possible
and appropriate to give a description of how long-term and sustainable its socio-econo-
mic consequences are, and how effective its final results are. In this regard, it can be assu-
med that in the foreseeable future, a new section will appear in economic statistics, which
will address issues of assessing the sustainability and effectiveness of the reform.
It is also important to consider the following. It is quite possible that the measures
to reform the economy after a sufficiently long period of time, although they will have
a significant positive effect, but at a certain point in this period the living standard will
decrease so significantly that it will lead to irreversible social consequences and even to
social collapse – In this case, one can speak of the sustainability of reforms (Khalevinskaya,
2004). Thus, analyzing the problem of the sustainability of the reform, it is necessary to
distinguish at least three of its various aspects.
First, it is necessary to propose a system of indicators characterizing the sustainability
of the reform in various aspects. It is clear that one indicator is hardly capable of characte-
rizing such a complex notion as the sustainability of the reform, so for this it is necessary
to use a group of heterogeneous indicators (more precisely, a system comprising several
groups of indicators characterizing the different aspects of the notion of the stability of
reformations). Secondly, it is necessary to consider these indicators in dynamics during
the analysis, and for a sufficiently long time period. Third, when analyzing the sustaina-
bility of the reform, criteria should be developed that allow determining the threshold,
critical values of various indicators characterizing the concept of reform sustainability,
for example, the maximum possible reduction in the standard of living due to ongoing
reforms, taking into account the proportion of the population below the poverty line; the
maximum possible duration of this negative trend, the maximum permissible concentra-
tion of harmful substances, etc. Thus, the development of criteria for the sustainability
of the reform involves studying both the dynamic criteria that characterize the threshold
time indicators and the static ones that characterize the different directions and compo-
nents of the concept of the sustainability of the reform.
If we attempt to generalize and graphically represent the question of the socio-eco-
nomic and environmental sustainability of the reform, we obtain the following scheme:
58
Konstantin Pavlov, Oleg Zakharchenko, Norhayati Zakuan, Sergii Kolodynskyi
Chapter 4. SOCIAL-ECONOMIC AND ENVIRONMENTAL SUSTAINABILITY OF REFORM: INDICATORS AND METHODS OF EVALUATION
Case 1. The stability of the reform in terms of the parameter (indicator) a
Case 2. Instability of reform in terms of the parameter (indicator) a

Option 1. Exceeding the upper criterion (threshold) value
Option 2. Exceeding the lower criterion (threshold) value
59
Option 3 (combination of options 1 and 2). Exceeding the upper and lower criterion
(threshold) values
Option 4. Exceedance of the temporary criterion (threshold) value
It is quite possible the combination of variant 4 and one of variants 1-3.

An explanation should be provided for the proposed schedules. First of all, we note
that on the basis of their analysis, the following definition can be proposed: the reform is
stable with respect to the parameter (indicator) a, if in the dynamics the value of this pa-
rameter does not exceed either the upper or lower threshold values, and outside the time
threshold interval the values of the parameter a are not omitted Below a certain minimum
acceptable value (in the chart-a’). In mathematical form this can be expressed as follows:
1. fup(t) ≥ fа(t) ≥ flow(t);
2. fa(t`) ≥ C либо fa(t`) ≤ C,
where fup(t) and flow(t) – respectively, the functions of the upper and lower threshold values (we add
that the inequality 1 need not be double, because not always, from the economic point of view, it is expedient to
look for both upper and lower threshold values, it is often enough to find one of the two; Also, that the upper
and lower thresholds are not necessarily constants, but more often they are functions that depend on time);
60
fa(t) is a function of the values that the parameter a takes as a function of time t;
fa(t`) - the value of this function at the point of the temporary threshold value;
C is a constant characterizing the limit below (or above) which the function fa (t) should not descend
(rise) beyond the time threshold interval.
The truth of this definition is confirmed by the study of the dynamic characteristics
of the most important indicators characterizing the efficiency of the functioning of the
social and economic system. For example, let’s take the most important indicator, as an
indicator of the standard of living. Obviously, this is one of the most significant indicators
characterizing the success and effectiveness of the ongoing reforms, which ultimately are
realized in the interests of the whole society (it should be added that, based on the propo-
sed approach, one can determine the sustainability of any reform).
If we analyze the problem of sustainability of the process of implementing the reform
in terms of the indicator (level) of the standard of living, then it is obvious that one can
speak of the sustainability of reform in this case only when the dynamic characteristics
of the indicator of the standard of living in the graphic image correspond to the case
reflected in the scheme1. In other words, it is possible to speak about the stability of the
reform in terms of the parameter (indicator) of the standard of living only when its values
during the reform are not lower than the lower threshold, and when the time threshold
is reached, at least its stabilization or, even better, growth is observed. In all other cases,
it can be safely asserted that the process of implementing the reform on the indicator of
the standard of living is unstable (i.e., or at certain points in the time threshold interval,
this indicator takes values lower than the lower threshold value, or after reaching a tem-
porary threshold value, at least stabilization the indicator of the standard of living does
not come). Similar conclusions can be drawn when the question of the sustainability of
the reform is analyzed by the indicator of the proportion of the inhabitants of the country
living below the poverty line, for even in this case the values of this indicator over the time
threshold interval should not be less than the lower threshold, and after the value of this
indicator should be significantly reduced.
When studying the question of the sustainability of a reform on a certain parameter
based on the proposed graphical scheme, the following should be borne in mind. Not
for any indicators should you define both the upper and lower threshold values of the
parameter; which one (or both may be both) to choose – should be determined on the
basis of economic feasibility (for example, to analyze the question of the sustainability
of the reform in terms of the standard of living, there is no need to determine the upper
threshold, while the lower threshold value is simply necessary, on the other hand for such
an indicator as the unemployment rate, on the contrary, it is advisable to determine the
upper threshold value).
As for the categorical apparatus of the concept of economic and environmental su-
stainability of the reform, then, of course, given the novelty of the subject of research,
approaches to the definition of individual terms hardly can claim to be the ultimate truth.
So, it is quite possible to replace the concepts of upper and lower threshold values by the
terms maximum and minimum thresholds. Similarly, it should be borne in mind that both
the upper and lower threshold values may not always be the same at any point in the time
threshold interval – it is very likely that they will differ significantly at different points.
As for the specific values of the upper and lower thresholds, they depend on many factors
61
– on the parameter itself, on the specific conditions (including regional and sectoral) of
social reproduction, on a specific point in the time threshold interval, etc. So, it is natural
that threshold values of indicators of a standard of living and degree of unemployment
essentially differ. Similarly, the threshold value of the degree of unemployment varies si-
gnificantly between countries, at different time periods, etc.
The proposed definition of the environmental and economic sustainability of the re-
form by some parameter generally corresponds to the traditional understanding of the
problem of the stability of certain processes. We also add that the approach proposed by
us allows to solve the question of the sustainability of any reform option, and not just
a monetarist type reform. With this understanding, it is quite possible that the stability of
the reform takes place on certain parameters, while on other parameters it is not necessary
to speak of the sustainability of the reform. In this case, it is necessary to first identify the
relevant parameters, that is, in other words, rank the indicators in terms of their impor-
tance for the normal functioning of society, and already from the significant to identify
those indicators by which the reform is unstable; and already if there is at least one such
significant indicator, then in general it should be considered that the reform is unstable.
Thus, reform as a whole is stable if and only if it is stable for each significant parameter. In
this regard, it is necessary to consider a group of parameters (indicators) that are essential
for the effective implementation of socio-economic transformations.
In principle, the sustainability of the reform can be assessed by any parameter, but it
is not economically feasible for every indicator. It should also take into account the fact
that the number of economic indicators is very high – about 2 thousand. In our opinion,
you can select a system that includes a relatively small number of indicators that are
essential for determining the question of how sustainability of the socio-economic trans-
formation. Taking into account that the main goal of the reform, as a rule, is ultimately
to increase the efficiency of the economy and increase public welfare, it is reasonable to
classify the indicators of the level of life (which, in turn, depends on indicators such as
the average wage, Income from property, price level, etc.), the unemployment rate, indi-
cators characterizing the differentiation of incomes of the population and others that
determine the degree of public welfare. This also includes indicators that characterize the
effectiveness of economic activity and aggregate indicators-the aggregate social product,
national income, production of industrial products, agricultural products, etc. (the same
indicators can be added to this group as per capita). The indicators of intensification of
social reproduction, which, as already noted, are the basis for the growth of economic and
ecological efficiency and material well-being of society (reduction in the level of inten-
sification of production can lead to extremely negative long-term consequences) should
be regarded as the most important for determining the sustainability of the reform. Here
we should highlight the indicators of mechanization and automation of production, the
introduction of the most advanced machinery, indicators of renewal of fixed assets, etc. In
a special group should be highlighted indicators characterizing the environmental aspect
of the reform, which will allow to assess the impact of socio-economic transformation on
the environmental situation. These are, first of all, the indicators characterizing the level
of costs for the nature protection measure and their dynamics, comparing actual values of
substances with their MPCs, etc.
62
Of course, the choice of significant indicators will largely be determined by the objec-
tives of the study, the type and nature of the reforms being carried out, national peculia-
rities, the specifics of the reform stage, and so on. It is also important to consider the fol-
lowing. An analysis of the problem of the environmental and economic sustainability of
the reform can be carried out at various levels: at the regional, sectoral, and the economy
as a whole. It is very likely that along with the indicators necessary to characterize the su-
stainability of the reform at any level, indicators specific for a certain level will be needed.
For example, when studying the problem of sustainability of reform in the region, along
with the indicators already listed, it may also be necessary to use the indicator of incomes
and expenditures of local budgets. Moreover, in this case, the general level indicators when
analyzing the sustainability of the reform in a particular territorial entity will be used in
the regional context. Similarly, the case will fare in the study of sustainability issues in the
reform of a particular industry (i.e, at the sectoral level).
The most important problem is also the search for specific threshold values for each
significant indicator. Here we mean both static thresholds – upper and lower threshold
values, and dynamic ones – temporary threshold values. Of course, all these different thre-
sholds can vary significantly for each indicator; moreover, even for the same indicator, the
thresholds can vary significantly depending on the sectoral and regional specifics. They
will depend on other factors, such as the general socio-political and economic situation,
international support for reforms, etc.
Nevertheless, it is possible now, at this stage of the research (and our research of this
problem has a predominantly production character), make certain assumptions about cer-
tain threshold values. So, considering that the reforming transformations are not one-act
ones, but are, as a rule, of a long-term nature, it can be reasonably assumed that for many
significant indicators the temporary threshold value is at least 7-10 years. In other words,
only after this period you can expect a steady increase (or decrease – depending on the
specifics) of a meaningful indicator. This is evidenced by the experience of reforming the
Russian economy in the past, and foreign experience in implementing socio-economic
transformations (in particular, the experience of Latin American countries, which many
scholars are so fond of referring to). However, in some cases, the time threshold interval
can be either longer or shorter than the specified time period (often only 15-20 years later
stabilize, for some significant indicators in a number of countries, 5 years are enough, but
the threshold is the norm, not the averaging actual data).
As for static threshold values, their variation is even greater, if only because for each
significant indicator it is necessary to determine specific threshold values. So, as the lower
threshold of the indicator of the standard of living, it is expedient to use, as it would seem
perfectly justified, a minimal consumer basket. However, as we know, in different regions
of the minimum consumer basket may vary significantly (for example, it is higher in the
North of Russia, than in the middle lane). Besides its value is largely determined by cal-
culation method (as known methods for calculating the minimum consumer basket often
vary greatly in different countries). Considering also that in realizing radical social and
economic transformations, the real standard of living often “falls short” to the minimum
consumer basket, it is legitimate in this connection to doubt that the minimum consumer
basket is the minimum (lower) threshold value of the standard of living.
Then what is the minimum threshold for this indicator? It is obvious that consumption
63
at a level much less than the minimum consumer basket can lead to death. How justified
are the reforms if they will have one of their results of this kind of cases (here it should
be added that in some countries, reforming the economy based on monetarist principles
sometimes led to such consequences)?
If we admit (and it is quite justifiable from the humanistic point of view) that such
deaths are not permissible under any version of the reform, the question of how much the
consumption level can be less than the minimum consumer basket is completely legitimate
so that such deaths are excluded (clearly , That in this case this level of consumption will be
the lower threshold value, although it should be added that its definition is very difficult,
because individual physiological differences are very great in the necessary level of con-
sumption)? It should also be added that the standard of living is not at all limited to the
consumption option – here it is necessary to take into account the degree of solution of the
housing problem, and the level of development of the social infrastructure, etc. Moreover,
one should take into account not only the static but also the dynamic aspect of this problem.
It should be noted that a number of significant indicators are interrelated, ie. a change
in one of them significantly affects the characteristics of the other. So, it is clear that the
indicator of the standard of living is directly related to the indicator of the proportion of
the population that is below the poverty line, as well as generally with the indicators of
income differentiation. According to some estimates, about one-third of the population
is below the poverty line in Russia, and the degree of differentiation between the incomes
of the richest and the poorest is very, very high (even higher than even in a number of
developed countries). The income level of 10% of the richest is 25 times higher than the
income of the poorest. And this is with the traditional communal relations of Russians!
The unemployment rate is also very high: the number of unemployed is approaching 5
million people, and taking into account underemployment - to 10 million or 12% of the
economically active population. How permissible is such a degree of differentiation and
such a decline in the standard of living of such a large part of the population? How much
is this unemployment rate?
Considering also that many people do not receive wages for several months, the high
degree of differentiation of incomes of the population and the significant reduction of
such a large part of the population not only do not indicate the sustainability of the
chosen course of reform, but, on the contrary, testify to the near collapse of the chosen
model of social and economic development. And although profound scientific research
is required on the acceptable thresholds for such indicators as the standard of living, the
proportion of the population below the poverty line and the degree of income differen-
tiation, in our opinion, the chosen strategy of forming a market environment based on
monetarist principles, a priori, from the very beginning was fraught with for Russia and is
doomed in the long run to failure. And the given values about the decrease in the standard
of living of a significant part of the Russians, for the sake of which the well-being of which
reform was conceived, are evidence in favor of our point of view.
The fact that the chosen reform strategy is not stable is evidenced by the dynamic cha-
racteristics of other important indicators, such as the production decline indicators, the
indicators characterizing the level of intensification of social production. In conclusion,
we note that here only the ecological and economic aspect of the sustainability of the re-
form was analyzed in sufficient detail. However, in our opinion, by analogy it is possible
64
to consider other aspects of environmental sustainability – biological, geographic, etc.,

and, thus, to study the problem of environmental sustainability of the reform as a who-
le. To ensure the sustainability of reform and the development of a rational option for
environmental and economic policy great importance is the solution of the problem of the
optimal choice of elements of the ecological and economic core of the national economy
as a whole, as well as of its individual industries and regions. The problem of ensuring
the ecological and economic sustainability of the operation of production systems will be
discussed in detail below.
References:
Pavlov, K.V. (2009). Pathological processes in the economy. Moscow, Russia: Magistr.
Khalevinskaya, E.D. (2004). World economy and international economic relations: Textbook. Moscow,
Russia: The Economist.
Zhemchuzhnikova, A.V., Tolkushkin, A.V., Kravchenko, I.A., et al. (1989). State financing of
scientific and technical progress in developed capitalist countries. Moscow, Russia: Finance and Statistics.
65
Chapter 5.
THE ESSENCE AND CONCEPT OF BUSINESS
ACTIVITY AND ITS MANAGEMENT
Maksym Hodyashchev, Nataliia Rekova, Ungku Norulkamar Ahmad
1. The essence and concept of business activity
I n recent years Ukraine’s economy is in an unstable state of crisis, caused by the in-
stability of the global economic system as a whole and political, socio-demographic,
financial, ecological country systems including. Therefore the activities of enterprises
need to constantly adapt to the difficult conditions of existence, finding the best ways of
business development, to choose the most correct decisions in solving problems and de-
velop such mechanisms management, that ultimately it was not only absorbed the crisis,
but also had a strong position in the market was profitable and competitive, justify the
strategic goals and objectives that were set at its foundation.
In conditions of sustainable economy functioning of enterprises depends on many fac-
tors, the main ones: legislation, competition and the capacity for continuous development
of the company. It is understood that in times of crisis or other complicated situations, these
factors are changing and this creates a certain threats and some new features that need time
to see and direct activities of the company on track. Crisis economy this is a new phenome-
na and processes that require good decisions and qualitative changes. Therefore enterprises
priority understands the effects of variability of the environment in which they operate
and therefore – timely response to these changes by taking effective management decisions.
However it is understood that the crisis for the enterprise can be not only a state of
shock, complications fragility of the financial and economic situation, but also a signifi-
cant impetus to the implementation of changes and transformations.
Such conditions of existing lead to economic entities significance, their specificity
and identity management solutions. It should be noted that in a competitive market in-
creasing management responsibility for the outcomes of industrial, financial, economic
performance and its market position.
At present one of the most important characteristics of the company is its business
activity. Given the capacity and content of the concept of business activity it is reasonable
description of the essence of this concept, research of the category activity.
Considering the activity from a philosophical point of view it is treated as efficiency,
effective behavior (Philosophical Encyclopedic Dictionary, 1993); effective participation
in anything (Large Encyclopedic Dictionary, 1994).
In psychology the activity is characterized as an activity, an active interaction with
the surrounding reality, in which the creature serves as the subject, specifically affecting
the object and thus satisfies their needs. This means the recovery of energy structure,
properties, functions and processes of living beings, its place in the world by and large
saying – about playing on any measurement of his life unless they are considered essential
and inalienable (Karpenko, Petrovsky, & Yaroshevsky, 1998, р. 129).
S.Y. Golovin defines the activity as a concept that expresses the ability of living creatures to
carry out arbitrary actions and policies by external or internal incentives-irritants, i.e. general
characteristics of living things, their own dynamic transformation or as a source of support is
vitally important relationships with the environment. Activity is built according to probabili-
stic forecasting developments in the environment and its position in the system. In psychology
appears in correlation with the activity, manifesting itself as a dynamic condition of the for-
mation, implementation and modification as the property of its own motion. It characterizes:
1. in a greater extent – conditioning conducting specific actions of the internal state of the sub-
ject at the moment of action – unlike of reactivity when action due to the previous situation;
2. arbitrary – the conditioning of the existing purpose of subject is in contrast of the field behavior;
3. oversituational – is going beyond the initial goals unlike adaptive as limiting action narrow
limits set parameters;
4. significant resistance activity to the adopted goal unlike to passive assimilation of objects
which have to meet the subject in carrying out of business (Golovin, 1998, р. 226–227).
Therefore activity is a rather voluminous concepts and modern scientific thought
does not give a single meaningful definition of this term. However it should be noted that
the activity has some special features that are specific determinant and which are inherent
to living organisms as well as different economic systems developing. These features are:
activity, efficiency, dynamics, and ability to change. Therefore activity can be characteri-
zed as a concept that defines the paces, directionality and intensity actions and measures
certain phenomena and processes.
Study characteristics and problems that occur in business processes as multifaceted
socio-economic and technical systems which are functions in a constantly changing bu-
siness environment, and reflect the challenges and opportunities for the implementation
of its business activities grounded in the writings of J.P. Kwach & et al. (2008, р. 93–94).
The authors note that the stability of business entities in terms of permanent changes es-
tablished system provided reliable communications with contractors, formation of trade
relations, following the requirements for technical and production process, accessibility
to credit sources, development of human potential.
Successful achievement of the basic prerequisites of effective development possible with
regular tracking, assessment and forecast market species such as finance and credit, labor, trade
and so on. I.e. the company must make a continuous search for the most beneficial tools that
will help to achieve its main goal and show the active position in the business environment.
Consequently business activity of the enterprise is very broad concept which combi-
ning many aspects of work and is one of the key factors that influence the effectiveness and
quality of doing business processes, productivity social production and its social identity.
Investigating activity in terms of the enterprise as industrial and commercial machi-
nery, modern scientists and researchers are equated this notion of commercial activity and
market activity. Definition of different authors shows that market activity characterizes
68
Chapter 5. THE ESSENCE AND CONCEPT OF BUSINESS ACTIVITY AND ITS MANAGEMENT
the enterprise on the market and its image for consumers and competitors. Thus, V.V. Ko-
valyov is characterizes the market activity of different interpretations (Kovalev, 2006, р.
372). From the standpoint of the company which quotes their securities on the stock ex-
change it means a set of activities that contribute to stable its position in the capital mar-
ket. From the perspective of other companies market activity means control the dynamics
of the capital market whose main goal is identify the general economic and industry trends,
assess the position of the main competitors and (or) companies determine the «weather» in
a particular sector of goods and services, the formation efficiency of investment portfolio.
Such scholars as R. Braley and S. Myers (2008, p. 965) in their writings emphasize
the fact that the market activity of enterprises is formed its image from consumers and
competitors, defines the situation on the stock market and is accompanied by increased
amounts of dividends. The same opinion has M.M. Jacuba (2004, p. 43) noting the impact
of market activity is the image of the entity. Thus these researchers are focused mainly
on the market components such as the reputation and image of the company, its market
value, identifying with their business activity.
Some scholars in their writings determining market activity as a view on the market
and the market perception of the degree of development (Kotenok, 2008, р. 205). Altho-
ugh this definition essentially describes the image of the company and only indirectly
related to business activity.
So based on the described definitions the market activity should show the level and
weight on the market and its image for contractors.
The essence and practical value of the commercial activity in the current market
environment has not gained a single comprehensive study. The results of economic studies
are shown that commercial activity can be defined as aggregate measures for the effective
implementation of production processes, acts of sale parties to commercial traffic, service
in order to fully meet market demand (Sinyаeva, 2000, p. 113).
Many authors rightly emphasize the importance of the process of purchasing goods.
However some scholars mistakenly include in the content of the commercial activity the
unusual elements, such as the operation of storage products. We believe that the commer-
cial activity does not cover technological function processes of production, trade, sales.
We are not agree as to the fact that the activity aimed at making profit is a commercial
because its object serve not all inputs, but only them are products.
However despite the differences, the researchers concurred that the subject of com-
mercial activity by those processes of enterprises, resulting in trade with mandatory con-
sideration of customer satisfaction.
Based on the table it should be noted that the identification of the commercial ac-
tivity of the business is not quite correct since the first is only a part of business activity
because not only covers the manufacturing processes of the enterprise, but doesn’t include
other areas of its operations such as investment, financial, social activities and more.
The analysis of the definitions shows that various authors are interpreted quite ambi-
guous terms «market activity» and «commercial activity» because used to describe such
signs and indicators that reflect the right position on the market, its exchange of commo-
dities and so on. Such mixing concepts for this essence and objective indicators significan-
tly complicate the economic evaluation of companies does not allow a clear focus of the
studied categories, and thus to make correct management decisions.
69
Table 1. The definition of commercial activity by foreign and domestic scientists

Author Essence of commercial activity
1 2
B. Reisberg Type of company activity, which is characterized by the crucial role it plays in the
(2002, p. 228) commodity-money trade and exchange operations
Z. Varnaliy Complex transactions related to the exchange, distribution and consumption of
(2002, p. 78) goods and services
Set of measures to implement products that affect the final result of commercial
F. Polovtseva enterprise, that is commodity-money exchange, during which goods from the
(2001, p. 193) supplier transferred the ownership of commercial enterprises focus on market
needs
I. Belyaevsky Set of measures and actions of the sale and storage of goods to meet consumer
(2005, p. 58) demand and profit
A. Busygin Complex operations that ensure the sale of goods and with trade processes form as
(2001, p. 15) a kind of trade activity
V. Apopiy The way the commercial processes as consistent operations, providing
(2005, p. 15) organizational, economic, social and legal aspects of commodity-money exchange
L. Dashkov,
V. Pambuhchiyants The set of rational methods and techniques of effective trade and operations process
(2007, p. 339)
I. Marchenko The system of operational and organizational measures for the organization and
(2010, p. 27) management of the sale of goods to meet consumer demand and profit
Source: systematized by the authors.
In that time when the listed categories describing the company are based on its po-
sition in the roar, the business activity of the company in our view more associated with
domestic economic aspects of the company. Therefore we think that should be given a cle-
ar definition of categories of «business activity», «market activity» and «commercial ac-
tivity» of the enterprise.
The concept of business activity quite wide and covers almost all aspects of the enter-
prise. A research the developments of scientists regarding the interpretation of the term
indicates their diversity and inconsistency. It can define this concept in broad and narrow
sense. In a broad sense it aims to promote in product, labor, capital and in the narrow
meaning is industrial and commercial activity, the success of efforts and resources, the ef-
fectiveness of management. Another words business activity can be considered in relation
to the accumulation and management of internal resources, economic growth and activity
in the external economic environment.
Domestic activity is the accumulation of economic potential of the company and esta-
blishing a mechanism to improve the efficiency of its use. In the external sphere of activity
is treated as a combination of quantitative and qualitative parameters such as the image
of the enterprise, social activity, position on the market dynamics of the stock activity. To
conduct the analysis of the theoretical foundations of business activity expedient of taking
into account the approaches to the definition of the term (Table 2).
70
71
Table 2. The characterization of definitions essence of business activity
The author Definition of concept Positive aspects Disadvantages
1 2 3 4
Business activity of the enterprise may be defined as
a complex comparative characteristics of the enterprise The indicator is measured complex
Identified with market activity since only
I. Ansof which reflects the degree of aggregate benefits of its elements which is a significant value in
taken into account the market performance
(1999, p. 213) performance indicators that determine the success of the carrying out economic analysis of the
of the enterprise
enterprise in the marketplace over time, relative to the company
aggregate performance of competitors
Business activity of the company in the financial aspect
The main parameter to analyze business

appears first in its rate of turnover means. Business activity The author describes the business activity
activities in favor of its financial
L.A. described as motivated macro- and microeconomic level as a management process, without which
component. Accepted into account the
Lahtionova management process of sustainable economic activities it can not achieve its main goal now and
estimated parameters that affect only the
(2004, p. 71) aimed at ensuring its positive dynamics, increasing strategy. This takes into account timing and
financial aspect of business activity; does
employment and efficient use of resources to achieve some motivational factors
not include other aspects of the indicator
market competitiveness
Business activity means the efforts that the company is

It characterizes the state industrial and
making to enter the market of products, labor, capital,
V.O. Mets commercial enterprise, information on
and in the analysis of financial and economic activity this
(2003, p. 114) which is important both for the entity, and Business activity equivalents to the market
term is used to characterize the current production and and commercial activity and therefore only
potential lenders and investors
commercial activities includes market valuation characteristics
O.O. In determining this indicator are used not without managerial or organizational
The whole complex efforts that are maked the company in
Sheremet only his financial performance but also components that are helped to make
product, labor and capital
(2005, p. 56) production and human a qualitative analysis. A lack of key values
Business activity is an important market-oriented The indicator studied both in terms of and parameters affecting the quality of
categories. In the broadest sense means the entire spectrum internal factors (financial and production management decisions and then – to the
O.O. Zaikina, position of enterprise on the market, its
of efforts to promote enterprise in product, labor and activities of the company) and with
V.V. Kovalyov competitive
capital. In the narrow sense is meaning its industrial and market-based orientation. This analysis
(2006, p. 349)
commercial activity, the success of efforts and resources, provides a more meaningful picture of the
the effectiveness of management state of business activity
Source: systematized by the authors.
Researches of most scientists boil down to determining business activity only in terms
of several aspects. First it focuses on the origin of this indicator to market-oriented cate-
gories as evidenced by those of its features that characterize it market position of the com-
pany, namely the commodity level, the image of the company, competitiveness and so on.
This conclusion are followed V. Kovalyov (2006), A. Sheremet (2005), V.A. Mets (2003) and
others. However we believe that the business activity of enterprises should not be limited
to macroeconomic parameters since it describes more internal aspects of economic activity.
Some authors are separated only financial characteristics of the index. There are the
security of company the working capital and the rate of circulation, the value of advanced
capital and so on. The results of these studies are reflected in the works of L. Lakhtionova
(2004), I. Ansoff (1999) and others. However the current state of the economy requires bu-
sinesses fundamentally new approaches for indicators that are characterize the different
areas of their business. Therefore the using only financial component to determine the
nature of business activity is not sufficiently justified. It is needed to account the factors
of management, information security, and enterprise potential by areas of its activities,
organizational factors and others that gives a better idea of the nature of business activity.
Thus the analysis of existing views to the interpretation of business activity shows that
different authors define the term is ambiguous. Some of them are focused on its market orien-
tation describing in this case «market activity». At the same time the other research scientists
are focused on the study of internal financial factors affecting the level of business activity.
Such mixing views and opinions on the definition of business activity complicates the im-
plementation of an objective assessment of companies can not properly distinguish between
the category of «market activity», «commercial activity» and «business activity» thus denying
access development and adoption of quality management decisions in business activity.
Summary of theoretical characteristics of the nature of business activity allows enter-
prises to identify and define the role of indicator of other categories of activity, highlight
its key features, trends and scope (Fig. 1).
Based on the analysis we can distinguish five basic properties of business activity. First,
by using ratio analysis it allows for the assessment of the financial condition of the com-
pany. Second, it characterizes the using potential of the company by determining its real
capacity in a particular area, the availability of production resources and reserves, quality
of labor resources, organizational structure and so on. Third, business activity significantly
affects the position that enterprise is occupied on the market, its competitive position.
This is evident by turnover rates, availability of markets, the company’s image and more.
The fourth feature of business activity involves the continuous monitoring it is making for
appropriate management measures. I.e. there is a systematic process of observation and analy-
sis of dynamic business processes that affect the level of business activity to adopt quality ma-
nagement solutions. With the latest features business activity are provided identify strengths
and weaknesses in the enterprise that must be considered when forming various strategies.
Experience processed professional sources and analysis of various opinions of econo-
mists leads to the formation of its own definition of business activity. Consequently busi-
ness activity is a combined indicator that allows estimate of an enterprise in retrospective
by using features that characterize the complex socio-economic, industrial, technical and
technological system in the various business environment and reflects the quality of using
by enterprise its potential for future adoption management desigions.
72
Unlike the existing economic literature in modern interpretations copyright defi-

nition is characterized by integrity into account requirements for the operation of dome-
stic enterprises, the definition of important subsystems, their assessment and analysis that
makes good use of its potential businesses providing a competitive position in the market.
Affects the position occupied

on the market, its competitive Helps identify strengths and
weaknesses in the formation of
business strategies
Allows to evaluate the

financial condition of the
BUSINESS
company
ACTIVITY
Provides continuous monitoring

Measures the level of use of for the implementation of
potential of enterprise management measures
Fig. 1. The key features of business activity

Source: developed by the authors.
2. The management of business activity

Given that the business activity as a process related to the results of activity of the
enterprise potential and its competitiveness, in the management of enterprise develop-
ment management business activity must occupy a leading position because it creates the
appropriate conditions for the growth of its value.
The term «management of business activity enterprise» can be seen as the impact of
the management entity to the current plans for the formation, distribution and redistri-
bution of all kinds of available resources to continuously improve enterprise efficiency at
the micro and macro levels.
Management of business activity covering various spheres of activity. These areas may
be industrial, financial, innovation, social, environmental and so on. In an analysis of the
economic literature it was determined that most scientists are focused on two main areas
of business activity management:
1. socio-economic governance;
2. performance management of economic activities.
The defining essence of the first direction control the business activities of enterprises
– socio-economic governance is to provide the expected overall effect. In this case analy-
zed the impact of industrial and economic activities as well as the degree of economic
feasibility of the measures and programs.
73
Significance of social and economic control is determined in proportion to its econo-

mic and social aspects. In this context the economic aspect is considered as a meaningful
impact on the relevant structural elements of the company namely the system of relations
between the personnel, resources (financial, material, information, etc.), results manage-
ment, for the purpose of to ensure its effectiveness, competitiveness, increasing cost and
so on. Such actions by management of companies can be made with the right manage-
ment, development targets and measures for their use and control.
The methods of management of usiness activity are considered set of ways and means
by which the managing entity (enterprise) may affect the object for a particular purpose
and they describe a complete act of influence on any object management (business activi-
ty). The main methods of economic management are: financial incentives for staff; econo-
mic calculation; balance method; method of financing; price controls; lending.
Financial incentives for staff includes different forms and systems of wages, organiza-
tion of bonuses for employees. It is carried out in addition to the existing system of hourly
and piece-rate wages to encourage employees to effective work, achieve high end results of
production and accelerating scientific and technological progress which are the structural
components of business activity (Polischuk, 2011).
Economic calculation is a method of keeping the company in which each company
compares cash expenses and results of production (services) seek to recover costs by own
income, that is ensureing self-sufficiency and optimal profitability, thereby ensuring the
achievement of financial and economic component of business activity.
The balance method is a method that is used to plan business activity to achieve balance
in the areas of production and personal consumption by matching resources (material, labor,
financial) and the need for them. The system of these resources in the management allows
the business activities to ensure a balance of individual sections and plan for economic and
social development in general. With balance method disclosed economic ties, the proportion
of the production cycle, identify bottlenecks and distortions, imbalances establish quanti-
tative parameters in different levels of economic activity (Balance planning method, 2008).
The method of financing is a combination of techniques and trends aimed at enter-
prises emphasize on internal financial sources and resources forming business activity at
a time when external sources play a supporting and regulating role. The main methods of
the modern enterprise are self-financing, public financing, investment, progressive finan-
ce, credit provision (Lanova, 2010).
Pricing of the company is the process of setting prices for a particular product. The
price of the company’s products is largely determined by external factors including the
impact of competition, participants tovaroprosuvannya channels (suppliers, intermedia-
ries) policy (Makarovskaya, 2013).
Thus the main determinants of the economic aspects the management of enterprises
is to create conditions and implement specified measures to ensure positive economic
activity, optimal use of potential and existing resource of enterprise aimed at organization
of business activity.
Regarding social management of business activity in the overall management is con-
sidered the management that enterprises carried out regarding the staff to implement the
motives of social behavior. Among the methods that can be used in the process of social
management are emphasized the social normalization and regulation; mental stimulation,
74
motivation techniques; psychological methods; methods of economic incentives; organi-

zational and administrative methods.
The social normalization and regulation is a scientifically substantiated organization
of social processes through social rules and norms that determine the order behavior of
individuals and groups in the team which helps to maintain business activity in the fra-
mework of social justice in the team and improve social relations between the employees.
Their means are collective contracts, agreements, contracts, mutual obligations, internal
regulations, statutes (sections are governing the behavior of civil servants), the rules of
etiquette, rituals, priority social needs, depending on seniority, workers of industrial acti-
vity etc. (Social regulation and regulation at the enterprise, 2012).
Moral incentives are most developed subsystem spiritual work incentives based on
spiritual values specific person. The essence of moral incentives is the transfer of informa-
tion about human achievements, the results of the social environment. It is the nature of
the information as the information process in which the source of information on the me-
rits employees are subjects of management; receiver is the object of incentives, employee
and collective, communication channel is communication tools (Stupyshina, 2009).
Motivation is a call to action; dynamic process of physiological and psychological
plan that controls human behavior and determining its organization, activity and stabi-
lity; human capacity to actively meet their needs. In the management of business activity
motivation is a process of incentives for workers to effectively carry out activities aimed
at achieving the perpous of the company. Motivation is necessary for the effective imple-
mentation of the decisions and tasks scheduled for the management of business activity.
Psychological methods in the management of business activities used to harmonize
relations firms and workers establish the most favorable psychological climate. Thay are
include the humanization of work (elimination of monotony, color spaces and color equip-
ment, using of specially neat music); psychological motivations (to encourage creativity,
initiative and independence); meet professional interests, improving the creative content of
work; development goal for psychological characteristics and development of the necessary
psychological traits; acquisition of small groups by the criterion of psychological compati-
bility of employees; establishment of normal relations between managers and subordinates.
Economic methods of management of the business activities are occupied an important
place in the system of management methods. This is because management relations are determi-
ned primarily by economic relations which are based on objective needs and interests of people.
The task of stimulating business activity is very hard. First it is needed to achieve the increasing
industrial activity, encourage the search for innovative solutions to create and maintain an at-
mosphere of corporate spirit. Secondly in a market economy is important not only industrial
and economic processes but its business results, reflected in specific performance indicators of
business activity: revenue growth, reducing costs, improving product quality. Commercial cri-
terion is crucial to assess the importance of personnel labour of the company. Thus the modern
approach of companies to stimulate labor is determined by two main points – the desire to in-
tensify the most creative person and send these activities to achieve concrete economic results.
Organizational and administrative management methods in business activity are set
of techniques and methods of direct managerial influence on the relations of people in
the workplace. Because through them directly implemented one of the most important
functions of governance is the function organization, the task of organizational and admi-
75
nistrative activity is coordination the actions of subordinates. Without organizational and

administrative influence can not be realized methods of economic management because
they provides clarity and order discipline of the team.
The second line governance of business activity aimed at efficient management of eco-
nomic activities characterized achieve the desired effect of discourse, i.e. the immediate
satisfaction the interests of owners.
Managing of business activity is a process aimed at ensuring sustainable and conti-
nuous improvement of enterprise efficiency. The main ways of increasing efficiency inc-
lude accelerating scientific and technological progress, the implementation of technical
reconstruction of production; improving the structure, forms of organization and produc-
tion management; improved utilization of assets; increased productivity; reducing pro-
duction costs; increase profits; improving organizational and technical level of enterprises
and economic work at all levels of government (Goncharuk, 2014, p. 29).
We can say that modern scientific thoughts are characterized by underdevelopment of
views on the management of business activity since only isolates its two main areas: a so-
cio-economic management and performance management of economic activities which
are varied by methods and ways of management. Thus the company can not conduct ef-
fective assessment of factors affecting the level of business activity and make quality ma-
nagement decisions.
The theoretical aspects of business activities of enterprises are allowed to form the
own definition of this category. Thus management of business activity is a complex of me-
asures (organizational, analytical, control) of regulation usage and adaptation potential of
enterprises aimed at coordination (correlation) of their activities with the requirements
of a dynamic environment. This interpretation of the definition makes logical outlines the
main management measures, their direction and period of application.
Thus the «business activity» is one of the main impacts which allows for the assess-
ment of its financial condition, helps identify strengths and weaknesses for strategy de-
velopment, characterizes the use of capacity, determines the position on the market, its
competitive position.
References:
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domestic trade. Bulletin of Don NUETU: Economic sciences, 4, 153–163.
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diya/20-b/792-balansovij-metod-planuvannya.html
Belyaevsky, I. (2005). Fundamentals of commerce. Moscow: Publishing House of MESI.
Braley, R. & Myers, S. (2008). Principles of corporate finance. Moscow: Olympus Business.
Busygin, A. (2001). The most important source of economic analysis. Business Newsletter of «Rus-
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Golovin, S. (1998). Dictionary of practical psychologist. Moscow: AST, Harvest.
Goncharuk, A. (2014). Management of the efficiency of production enterprises. Economy of the
food industry, 1 (21), 25–29.
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Jacuba, M. (2004). Problems of assessment of market activity of industrial enterprises in mo-

dern conditions, Scientific herald, 14 (2), 4.
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financial condition of an enterprise. Scientific and Technical Collection, 23, 208–209.
Kovalev, V. (2006). Finances. Moscow: Prospectus.
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development. Izmail: SMIL.
Lakhtionova, L. (2004). Financial analysis of agricultural enterprises. Kyiv, Ukraine: Kyiv National
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Polovtseva, F. (2001). Business activity. Moscow: Publishing house INFRA-M.
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77
Chapter 6.
THEORETICAL AND METHODOLOGICAL
BASES OF DEFINITION OF THE
ORGANIZATIONAL DEVELOPMENT OF THE
ENTERPRISE AND ASSESSMENT OF ITS
EFFICIENCY
Tetiana L. Mostenska, Oleksandra Ralko, Iryna Shkrabak
D evelopment is a necessary condition for the existence of organizations, which al-

lows it to survive with rapid changes in the external environment. Development
is an object of research in economics, management, sociology, and pedagogy. Given this,
there is no single approach to this definition.
The most generalized view of development can be defined as a process of regular
change, characterized by a transition from one state to another, a more perfect one; in
addition, development can be defined as a transition from the old qualitative state to the
new, from the simple to the complex, from the lower to the higher (Averyanov, Turovets,
& Yakovlev, 2000, p.47).
Presented in the scientific literature, views on development are summarized in Table 1.
Summarizing the given points of view, the following conclusions can be drawn. Deve-
lopment is considered as:
⁃⁃ Movement towards a new qualitative state;
⁃⁃ Possibility of realizing potential opportunities;
⁃⁃ Reaction to changes in the state of the external environment;
⁃⁃ Change in the qualitative and quantitative state;
⁃⁃ Reaction to changes in the external internal environment;
⁃⁃ Process of self-improvement.
Thus, the term “development” can be defined through the general characteristics that
are inherent in it, such as: quantitative and qualitative changes in the development object
that act as a reaction to changes in the state of the environment by improving internal
variables to maximize the realization of potential opportunities.
The carried out analysis of definition of development allows drawing a conclusion that it
can be considered from positions of functional, process, system and situational approaches.
Table 1. Synthesis of the views of scientists on the definition of development

Author, source Definition
G.S. Averyanov, Development is understood as the movement from one qualitative state to another, caused by
A.G. Turovets, & quantitative accumulations in the object, which lead to qualitative changes.
A.B. Yakovlev (2000)
Development is defined as the process of regular change, transition from one state to another,
A.N. Azrylian (2000) more perfect; the transition from the old qualitative state to the new, from the simple to the
complex, from the lower to the higher.
Development is characterized, first of all, by qualitative changes: improving the technological
R. L. Ackoff (1985) equipment of production, upgrading the skills of employees, changing the principles and
mechanisms of management.
Economic development is characterized by a change in market and production conditions over
O. Bakayev,
a long period of time, during which a significant role is played by investment, innovation, technical
V. Gritsenko,
and technological factors of the economy, as well as factors of economic ownership and economic
L. Bazhan, L. Bakayev
mechanism, representing the process of functioning and evolution of the economic system in the
& K. Bober (2005)
long run, which occurs under the influence of economic contradictions, needs and interests.
S.S. Bakay, S.O. Development is an irreversible, directed, regular change in matter and consciousness, their
Bilun, A.V. Svetlichna universal property; as a result of development, a new quality arises, the state of the object – its
(2002) composition and structure
V. O. Vasylenko Development is the property of a new quality, which strengthens the viability of the enterprise in
(2005) conditions of environmental changes; release of hidden opportunities and potential
V. O. Vasylenko Development is, first of all, a change, a movement. In the process of movement as development,
(2005) a new, necessary, capable of self-promotion, self-reproduction
O.S. Vikhansky, Development is a process of self-promotion from the lower (simple) to the higher (complex),
O.I. Naumov (1999) which reveals the internal tendencies of any kind of change of various forms of matter
Under development is understood: increasing the complexity of the system; improvement of
A.V. Dakus, adaptation for external conditions; an increase in the scale of the phenomenon; quantitative growth
N.O. Simchenko of the economy and qualitative improvement of its structure; social progress. The development of
(2012) any phenomenon is characterized by qualitative changes, i.e. transition from one state to another;
irreversibility of development, namely development implies stability; specificity
J. Joy-Matthews, Development is the improvement or improvement of the organizational component of an object
D. Megginson, or a consistent movement towards a more perfect, complex developed state or the realization of
M. Surtees (2006) potential opportunities
Development is a change caused by the objective need for social development; is a process
N. Maslyennikova
that is the result of successive actions that gradually lead the organization to quantitative and
(2002)
qualitative growth.
A.I. Kuz'mins'kyy, Development is a specific process of change, the result of which is the emergence of
V.L. Omelyanenko a qualitatively new, progressive process of ascent from the lower to the higher, from the simple
(2006) to the complex.
L.V. Mardakhayev Development is a directed, regular change under the influence of external and internal factors, as
(2005) a result of which qualitative and quantitative changes of the object occur.
Development is defined as a closely interrelated process of quantitative and qualitative transformations.
Quantitative changes as growth are the increase or decrease in the components of the organization.
S.V. Mochernyy
Qualitative changes are the transformations of the structure and functions of the organization, its parts
(2006)
and elements. The latter need not necessarily be accompanied by a change in quantitative characteristics.
According to the laws of dialectics, the driving force behind any changes is contradictions.
G.P. Popov, Development is an irreversible, directed, regular change in matter and consciousness, their
V.G. Grigoriants universal property; as a result of development, a new qualitative state of the object arises, i.e. its
(1980) composition or structure
Development is the qualitative and quantitative changes of the development object in a direction
V. S. Rapoport (1979)
that ensures the most complete satisfaction of one‘s own interests and external requirements
Development is a combination of changes leading to the emergence of a new quality that
I.I. Tymoshenko,
changes the life activity of the system, its ability to withstand the destructive influences of the
A.S. Sosnin (2001)
external environment.
Source: summarized by authors.
80
Chapter 6. THEORETICAL AND METHODOLOGICAL BASES OF DEFINITION OF THE ORGANIZATIONAL DEVELOPMENT OF THE...
Thus, G.S. Averyanov, A.N. Azrylian, O.O. Bakay, S.O. Bilun, A.V. Svetlichna,
O.S. Vikhansky, O.I. Naumov, J. Joy-Matthews, D. Megginson, M. Surtees, N. Masly-
ennikova, A.I. Kuz'mins'kyy, S.V. Mochernyy, G.P. Popov, V.G. Grigoriants, V. S. Rapoport
consider the development of objects from the standpoint of the process approach.
The process approach allows determining the changes in the development object
through a system of processes that interact and allow moving to a specific goal.
Situational approach in defining development characterizes works by O.O. Bakay,
V. Vasylenko, L.V. Mardakhayev, I.I. Tymoshenko, A.S. Sosnin.
The situational approach is characterized by the fact that for it the central impetus
for changes is the situation, that is, the composition of the circumstances that affect the
development object at a particular time and that leads to its changes.
Russell Lincoln Ackoff considers organizational development in terms of a functio-
nal approach.
The functional approach provides an abstraction from a particular object, focusing on
information about the functions that it performs. The functional approach allows deter-
mining the properties and characteristics of the object, based on the results of the changes
that need to be obtained.
A functional approach directs subsystems of objects to perform specific functions,
but also is very important the coordination between individual functions.
A.V. Dakus and N.O. Simchenko characterize the organizational development thro-
ugh the systematic approach.
The system can be considered as a set of subsystems and elements that are interrelated
and affect the state and form the characteristics of the system as a whole. The system as
a whole can function by building links between elements. In this connection, the connec-
tions can be functional, synergistic and redundant. From the point of view of develop-
ment, the change in the qualitative characteristics of the development object provides
a new qualitative content of the system as a whole.
Summarizing these points of view, it can be noted that development occurs through
the process of changing the functional elements of the subsystems of development objects,
depending on the influence of external factors on the development object, causing the
need for changes in individual elements of the system to ensure a new qualitative state of
the system as a whole.
Most authors note that, depending on the dynamics of quantitative and qualitative
changes, development can be characterized as stable, gradual (evolutionary) and intense
and abrupt (revolutionary).
Recently, in the management literature, more attention is paid to the study of orga-
nizational development. Necessity of research of organizational development is caused by
the following main reasons: constant changes in the conditions of functioning of organi-
zations, acceleration of the dynamics of the external environment, scientific achievements
in the field of research of group dynamics and group interaction, complications in the
procedure for making managerial decisions in the context of increasing the role of the
human factor.
The theory of organizational development is being studied by such scientists as: I. Ad-
izes, B.T. Alban, M. Albert, H. Igor Ansoff, M. Armstrong, N.V. Afanasyev, R. Beckhard,
B.B. Bunker, W.W. Burk, D.L. Bradford, Vail P.P., Hugh C. Hemmings, K. Ardziris, James
81
L. Gibson, V.A. Honcharuk, L.E. Greiner, Richard L. Daft, J.H. Donnelly, T. M. Egan, John
M. Ivancevich, I.V. Ivashkovs'ka, S.V. Koryahina, H. McLean, V.P. Martynenko, R. Marshak,
J. М. Mescon, R.A. Fatkhutdinov, F. Khedouri, E. H. Schein and others.
Definition of organizational development has a significant number of definitions, be-
cause it is used in many planes. So, Harry McLean (2009) notes, that the field of organiza-
tional development is very large and complex. Organizational development professionals
study organizational development in various contexts, using a wide range of methods and
processes to achieve the desired results in organizations (McLean, 2009, p. 6).
The theoretical complexity of a clear definition of the concept of “organizational de-
velopment” can be justified by different views on the development goals of the organiza-
tion by representatives of various organizational theories (Martynenko, 2006, p.121).
One of the first scientists who studied the problem of organizational development
was Richard Beckhard (1969), who in 1969 wrote that the organization’s development is
a planned, widely organized, top-down process that increases the efficiency and health
of the organization through planned interventions in the “processes” of the organization,
using knowledge behavioral sciences (Beckhard, 1969, p. 9).
After that, several attempts were made to characterize the definition of “organizatio-
nal development”, to generalize its definitions and identify common features.
Т.М. Egan (2002) explored the range of definitions for OD. While not a comprehensi-
ve review, he did identify 27 definitions between 1969 and 2003.
Providing all 27 definitions here probably serves no useful purpose. Thus, this section
will present a few definitions that express comprehensive different perspectives. Change,
whether planned or unplanned, is often associated with people’s understanding of organi-
zational development.
Egan (2002), using a card-sorting process based on the 27 organizational development
definitions, identified 10 clusters of dependent variables (or desired outcomes) contained
in the definitions (Adizes, 2008, p. 68):
⁃⁃ Advance organizational renewal;
⁃⁃ Engage organization culture change;
⁃⁃ Enhance profitability and competitiveness;
⁃⁃ Ensure health and well-being of organizations and employees;
⁃⁃ Facilitate learning and development;
⁃⁃ Improve problem solving;
⁃⁃ Increase effectiveness;
⁃⁃ Initiate and/or manage change;
⁃⁃ Strengthen system and process improvement;
⁃⁃ Support adaptation to change.
Some definitions of “organizational development” are given in Table 2.
82
Table 2. Synthesis of the views of scientists on the definition of organizational development

Author, source Definition
At each new stage of development an organization is faced with a unique set of challenges. How
well or poorly management addresses these challenges, and leads a healthy transition from one
stage to the next, has a significant impact on the success or failure of their organization.
Ichak Adizes (2008) Fundamental changes in leadership and management are all required, with an approach that
delicately balances the amount of control and flexibility needed for each stage. Leaders who fail
to understand what is needed (and not needed) can inhibit the development of their companies
or plunge them into premature aging.
Organization development is the process of increasing organizational effectiveness and
facilitating personal and organizational change through the use of interventions driven by social
Donald L. Anderson
and behavioral science knowledge.
(2017)
These definitions include the applicability of knowledge gained through the social and behavioral
sciences (such as sociology, business and management, psychology, and more) to organizational setting
Organizational development is an improving the organization‘s ability to solve various problems and
S.S. Bakay, S.O. Bilun,
the ability to update in the long run. The organization programs its development through technological
A.V. Svetlichna (2002)
and organizational innovations, improving the management of the company‘s culture, and training.
Organizational development defined as an effort [that is] (1) planned, (2) organization-wide,
Richard Beckhard
and (3) managed from the top, to (4) increase organization effectiveness and health through (5)
(1969)
planned interventions in the organization’s processes, using behavioral-science knowledge
Organization development is a system wide process of planned change aimed toward improving
W. Burke and overall organization effectiveness by way of enhanced congruence of such key organizational
D. Bradford (2005) dimensions as external environment, mission, strategy, leadership, culture, structure, information
and reward systems, and work policies and procedures
Organizational development is a planned process of organizational culture changes through the
W.W. Burke (1994)
use of technology, research and the theory of behavioral sciences
Organizational development is the process of formulating a vision of the future of the organization
and implementing planned changes, carried out by a team or a team of staff led by a manager due
T.P. Galkina (2001)
to changes in attitudes, behavior and performance of employees through their training, with the
help of an organizational development consultant.
Organizational development is a normative retraining strategy aimed at revealing the influence
R.T. Golembiyevski
on beliefs, evaluation and attitude to work within the organization so that it can better adapt
(1969)
to the rapid pace of technology change, in the industrial environment and in society as a whole.
Organizational development is a planned, managerial and systematic process of transforming the
G. L. Lipitt,
culture, systems and behavior of an organization with the aim of increasing its effectiveness in
W.A. Schmidt (1967)
solving problems and achieving goals
Organizational development is a consultative process that combines the practice of consulting,
E.N. Yemelyanov research and applied science at the intersection of organizational psychology, the theory of
(2000) organization and management, aimed at solving a wide range of tasks for the effective formulation and
achievement of the organization‘s development goals in both business and in non-profit structures.
L.M. Karamushka, Organizational development can be described as a methodology or technique that is used to
S.D. Maksymenko implement changes in the organization or its units in order to improve the effectiveness of
(2012) its activities.
Organizational development is manifested in the improvement of structural characteristics
V.V. Lavrinenko, both within the enterprise, where restructuring, reengineering, network or virtual principles of
V.I. Totsky (2008) functioning take place, and in its foreign policy, when it comes to the deployment of integration
processes taking into account the specifics of the market, strengthening competition and the like.
Organization development is any process or activity, based on the behavioral sciences, that, either
initially or over the long term, has the potential to develop in an organizational setting enhanced
Harry McLean (2006) knowledge, expertise, productivity, satisfaction, income, interpersonal relationships, and other
desired outcomes, whether for personal or group/team gain, or for the benefit of an organization,
community, nation, region, or, ultimately, the whole of humanity.
М. Mescon, The development of the organization is a long-term program to improve the organization‘s
M. Albert, capabilities to solve various problems and the ability to update, especially through improving the
F. Khedouri (1998) management of the organization‘s culture
83
Western Washington Organizational development is a practice to help organizations build the capacity to change and
University achieve greater effectiveness, typically involving employees through bottom-up involvement in
(WWU, 2015) change efforts
Organizational development is a combination of theoretical concepts and practical techniques
O.M. Panina (2006) designed to help the organization get more flexibility and adapt to change, and managers – to
acquire the necessary skills for this.
Organizational development is:
– the planned long-term process which is aimed at defining goals, organizing activities, motivating
and controlling (if necessary, adjustments);
– the process based on a system approach and links the potential of the organization with its
technology, structure and management;
V.I. Perebyinis,
– a process that is focused on solving the problems of the organization through the use of various
A.V. Svetlichna (2008)
theories and scientific research (including behaviorism);
– the process during which the organizational design is carried out, if necessary with the
involvement of consultants;
– the process of training, which provides for the retraining of personnel and is one of the means
of forming an organizational culture.
Organizational development is a set of scientifically based theories, values, strategies and
P.J. Robertson and techniques aimed at carrying out changes in the work of the organization planned to achieve
J.I. Porras (1992) individual development and improve organizational behavior, due to changes and restructuring
by members of the organization of working behavior
Organizational development is an organizational strategy based on ideas coming from group
dynamics, and on theory and practice related to the planning of change. This strategy represents
T.M. Fedoseeva (2002)
an integrated approach that allows to solve or help solve many complex problems facing people
in organizations
Organizational development is a long-term work to improve the problem-solving and updating
processes in the organization by more effectively co-regulating the cultural postulates of the
Wendell French,
organization with special attention to culture within the formal working groups with the help
Cecil Bell (1969)
of a change agent or catalyst using theory and technology applied science of behavior, including
the study of actions
Organizational development can be interpreted as a long-term work in the organization to
improve problem-solving and updating processes. Such development is a strategic way, on the one
F.I. Khmil (2003)
hand, the growth of the overall effectiveness of the organization, and on the other – an increase
in the sense of satisfaction and better working conditions for employees.
Organizational development concerns first of all the environment within the organization,
G.O. Shvindina (2016) therefore we can state that organizational development is a special case of the organization‘s
strategy
Organizational development is the process of positive and qualitative changes in the organization,
affecting mainly the structure, modes of activity and interaction. Criteria for positive changes are
such parameters as the survival of the organization, the effectiveness of its activities, providing
S.V. Mochernyy (2002) access to power or its preservation, compliance with the project or values. The qualitative nature
of the changes in the analysis process is evidenced by the fact that organizational development
is usually reflected in structural changes, so sometimes the notion of “structural and strategic
changes in the organization” is used instead of the concept of “organizational development”.
Source: summarized by authors.
As in the case of definition of development, the organizational development of scien-

tists is treated differently, from the perspective of different approaches to the manage-
ment of the organization.
Thus, the overwhelming majority of scientists define organizational development
from the standpoint of a process approach. These are such scientists as: I. Adizes, R. Bec-
khard, W.W. Burk, D.L. Bradford, F.I. Khmil, K. Steilmann, M. Dryakhlov, V. Hartmann,
S.V. Mochernyy and others.
Within the framework of the process approach, organizational development is the
result of programmed changes that are viewed as a certain logical sequence of actions le-
84
ading to a change in the intermediate states of the organization where this process occurs,
as a result of converting input resources into outputs.
In terms of a functional approach, organizational development is considered by S.S.
Bakay, S.O. Bilun, A.V. Svetlichna, V.V. Lavrinenko, V.I. Totsky, H. McLean, V.I. Perebyinis,
H.O. Shvindina and others.
Consideration of organizational development from the standpoint of a functional
approach is built on ensuring the interaction of management functions, thereby achieving
a certain state of the organization, which makes it possible to provide its new qualitative
and quantitative parameters. From the viewpoint of a functional approach to ensure a qu-
alitatively new state of the organization, a coherence of the interrelationships between the
individual functional units and the definition of those that can act as the driving force for
achieving the necessary organizational changes is a prerequisite.
The situational approach in determining the organizational development is the basis
of the research of such scientists as: R.T. Holembiyevs’kyy, M. Mescon, M. Albert, F. Khe-
douri, O.M. Panina, Wendell French and others.
The situational approach presupposes the most flexible management option for ada-
ptation to changes in the external environment. In this case, management of organiza-
tional development through the integration of management functions is used to ensure
qualitative changes, the implementation of which is entrusted with ensuring the state of
the internal environment, which most corresponds to external stimuli.
W. Burk and D. Bradford (2005) consider organizational development based on a set
of definitions, mostly humanistic, in the application of behavioral sciences and open sys-
tem theory (Bradford, & Burke, 2005, p.12).
This is the same point of view in works of I. Adizes, T.P. Halkina, G.L. Lipitt, E.N.
Yemelyanov, H. McLean, P.J. Robertson, Jerry I. Porras, W. French and C. Bell.
From these positions, organizational development can be considered as a complex
that includes basic values and principles, a set of concepts and models that constitute the
theoretical foundations of organizational development; a large number of methods and
tools through which programs of organizational development are implemented in practi-
ce. Representatives of the theory of organizational development can be conditionally divi-
ded into two groups, on the one hand, research and practice of laboratory training that are
closely related to the T-group process, and on the other hand, analysis of the organization’s
activities and feedback systems.
Historically, there are two trends in the theory of organizational development.
The course of T-groups was founded in the 30s of the 20th century on the basis of
the research of social psychologist Kurt Lewin. In his opinion, all people as members of
society belong to certain groups, and the leaders and members of the groups are constantly
interacting with each other. Kurt Lewin came to the conclusion that most of the effective
changes in the formation of personality occur in a group, rather than an individual context.
Kurt Lewin (1939), exploring the concept of group dynamics, first used the term “or-
ganizational development” in 1939. He related this concept to the way the group develops
what kind of behavior the members of the group demonstrate and how they interact with
each other. The work of Kurt Lewin has made a significant impact on the development of
social psychology. His work had a significant impact on the development of conflict the-
ory (conflict resolution technology). The idea of conducting group trainings for measuring
85
and evaluating certain behaviors is also owned by Kurt Lewin (1939). He suggested that
it is easier to change the behavior of individuals gathered in a group than to change the
behavior of each of them individually (Levin, 2000, p. 49).
During the 1950s and 1960s, the researchers of the behavior of R. Beckhard (1969), H.
Shepard (1967), R. Blake and J.S. Mouton (1964) developed the concepts and approaches
that characterized the theory of organizational development. They defined the boundar-
ies, tasks and philosophy of organizational development, the principles of implementing
organizational development, its methodological basis – learning by actions and reaction
to research (Beckhard, 1969, p. 43–51).
Herbert Shepard and Robert Blake conducted experiments in 1957–1959 on staff tra-
ining in three regional offices of Esso Standard Oil, as a result of which they came to
conclusions that largely determined the further direction of developing organizational
development models (Blake, & Mouton, 1964).
The study by Herbert Shepard and Robert Blake (1967) proved the need for support
and active participation of top managers in the effective implementation of organizatio-
nal renewal and staff development programs, found the important role of intergroup re-
lations in the organization’s activities and found the low efficiency of training outside the
everyday working environment of employees. After the experiments of Shepard-Blake, it
became apparent that an effective program of organizational development should be car-
ried out at all levels of the organization, starting with the highest, with special attention
paid to processes and interactions between working groups.
Another direction of the development of the theory of organizational development is
a study of the analysis of the organization’s activities and feedback systems. Almost simul-
taneously with the development of laboratory training methods, a team of researchers at
the University of Michigan’s Survey Research Center began using the Kurt Lewin (1967)
activity analysis model to study the functioning of organizations. Rensis Likert and Floyd
Mann conducted a global large-scale study of the organization’s activities in Detroit Edi-
son, systematically providing feedback to all the departments in which the data was collec-
ted. The receipt by departments and working groups of information about their own acti-
vities contributed to improving the effectiveness of the work of the groups and improving
the system of organizational performance analysis and feedback (Likert & Mann, 1969).
In 1964, the Organization Development Research Network (OD Network) was esta-
blished, an international organization that brings together organizational development
practitioners around the world. Around the same time, the Department of Organizational
Development was opened in the American Academy of Management.
Thus, the late 1960s and 1970s were the period when the behaviourist approach preva-
iled in management theory, and organizational development was considered by many
scientists as a solution to all problems associated with improving the effectiveness of or-
ganizations. Comprehensive programs using different approaches have been introduced in
a number of American companies, such as General Motors and Corning Glass and several
English ones. The research of American scientists, the results of which was cited by Wen-
dell French (1973), revealed that 70–80% of the cases examined had a positive effect. Wen-
dell French outlines the typical objectives of studying the organizational development
program, namely: to increase the level of trust and support among members of the orga-
nization; increase the number of discussions of organizational problems both within and
86
between groups, instead of not paying attention to them; Create an environment in which
the role of leadership based on knowledge and skills grows; to increase the openness of
communication directly, vertically and diagonally across the structure of the organization;
increase the level of personal satisfaction and enthusiasm in the organization; find a sy-
nergistic solution for frequently recurring problems (synergetic solutions are creative, in
which 2 + 2 is equal to more than four, by which all parties benefit more from cooperation
than from conflict); increase the level of their own and group responsibility in planning
and implementing a particular strategy (French, 1973).
The theory of organizational development with behaviourist positions had both sup-
porters and critics. Doubts about the effectiveness of research on organizational develop-
ment based on small groups were first voiced in the 1970s by R. Kahn. In 1974 he wrote
that this is not a concept, especially in the scientific sense of the word: it is not exactly
defined, it cannot be reduced to a concrete, constant form of observational behavior; it
cannot be described and verified in a specific workplace with the help of logically related
concepts and theories. In view of the foregoing, he wrote that, despite serious errors and
gaps, it can be improved by providing acceptable to application (Kahn, 1974, p. 490).
During the 1980s and 1990s, the emphasis on organizational development as a concept
of behavioral science was shifted to a number of other areas of organizational theory. Some
of them, such as organizational transformation have features similar to organizational de-
velopment. Others, such as team building, change management and culture management,
built on those basic ideas that were developed by the authors of the theory of development
of organizations, by specialists who practice organizational development.
G.L. Lipitt (1967) describes the renewal of the organization as a process of proposing,
creating and maintaining under control such necessary changes that enable the organiza-
tion to become and remain viable, adapt to new conditions, solve problems, draw conc-
lusions from its experience (Lipitt, 1967).
Wendell French and Cecil Bell (1981) define organizational development as a long-
-term work to improve the problem-solving and updating processes in the organization
by more effectively co-regulating the cultural postulates of the organization with special
attention to culture within the formal working groups with the help of a change agent or
catalyst using theory and technology applied science of behavior, including the study of
actions (French, & Bell, 1981).
The problem-solving processes are related to how the organization is assessing and
making decisions about the opportunities and dangers that arise in the external environ-
ment. Wendell French (1973) raise the question of whether the organization belongs to its
external environment, and, accordingly, to its mission, from the position of a decade ago,
or the organization revise its goal and methods of achieving it, taking into account the
present and the future (French, 1973).
A new round of intensive development of the theory of organizations began in the
early 80s of the twentieth century. This is the period of transition from classical appro-
aches to organizational development to new ones.
M. Beer (1980) notes that organizational behavior is the result of the fusion of several
forces, the interaction and mutual adaptation of which determine the evolution of the
organization over time. This led to a number of so-called “fit” or “congruent” structures
and theories (Beer, 1980).
87
Robert J. Marshak and David Grant (2008), suggested that in the theory of organiza-
tional development, a new set of methods and techniques can emerge that emphasize phil-
osophical assumptions and appropriate methodologies on social phenomena and social
reality that are somewhat different from several key assumptions put forth by its founders.
None of these methods apply to all different assumptions. At the same time, they empha-
size how new practices have emerged to address many of the basic assumptions about the
changes underlying “classical organizational development” (Marshak, & Grant, 2008).
In their article they give a comparative characteristic to the classical and new ap-
proaches characterizing organizational development (Table 3).
Based on the characteristics of a new approach to organizational development, chan-
ges are viewed as a self-organized, continuous process. With organizational changes, it is
necessary to focus primarily on the process of thinking and understanding that reality is
socially coherent and can include power and political processes.
Table 3. Trends of organizational development

Classical OD (1950s onward) New OD (1980s onward)
Based in classical science and modern thought and Influenced by the new sciences and postmodern
philosophy thought and philosophy
Truth is transcendent and discoverable; there is Truth is immanent and emerges from the situation;
a single, objective reality there are multiple, socially constructed realities
Reality can be discovered using rational and analytic Reality is socially negotiated and may involve power
processes and political processes
Collecting and applying valid data using objective Creating new mindsets or social agreements,
problem-solving methods leads to change sometimes through explicit or implicit negotiation,
leads to change
Change is episodic and can be created, planned and Change is continuous and can be self-organizing
managed
Emphasis on changing behaviour and what one does Emphasis on changing mindsets and how one thinks
Source: Marshak, & Grant, 2008, р. 8.
As a rule, the impetus for changes in the organization is crisis situations. Changes in
strategy, production processes, structure and culture can be carried out gradually, in the
form of small steps or radically, in the form of large jumps. Accordingly, we can talk about
“evolutionary” and “revolutionary” models of change.
Thus, regardless of approaches to organizational development, there are certain classifi-
cation characteristics that determine it. So, by the definition of R.A. Fatkhutdinov (2005),
development is extensive, intense, internal (the source of such development is in the middle
of the object) and external (determined only by external factors) (Fathutdinov, 2005, p. 344).
If evolutionary development is the result of gradual objective changes that the orga-
nization can counteract, changes in the external environment through the activation of
internal potential, then revolutionary development is due to rapid changes and the attrac-
tion of external resources to obtain a new quality.
According to N. Lisitsa and L. Khizhnyak (2008), organizational development should
be understood as a process of change, in the course of which certain models of the behav-
ior of the organization, individuals and groups included in its composition are formed,
adequately existing conditions, as well as all those interested in the development of the
88
corresponding organization of various social groups. An impulse to organizational dy-

namics can be provided from outside as well as from within an organizational structure or
organization (Lisitsa, & Khizhnyak, 2001).
At the same time, any changes require a change in the organization’s strategy. The new
organizational strategy becomes global in its nature, regardless of the scope of the enter-
prise, since it requires the achievement of a new qualitative state of the organization. Thus,
A. Lahti (1991) points to a new type of organizational processes that are the consequence
of the processes of globalization. A large-scale and hierarchical organizational structure
contributed to organizational development in an industrialized society, where the organi-
zation’s advantage is related to its location and the cost of labor.
At the present stage, the advantages of the organization lie in the plane of the net-
work of its business relations, and for their implementation a flexible type of organization
is required (Lahti, 1991, p. 15–21). In such an organization, the role of leader leadership,
initiative, ability of the organization to constantly learn and work in a team is enhanced.
Particular importance in the research of modern organizations is given to their existen-
ce not only in the actual social, but also in virtual reality, where instead of things (existing),
simulation takes place. The following are recognized as universal properties of virtual reali-
ty: immateriality of action/influence (what is depicted reproduces the effects characteristic
of the real); Conditionality of parameters (objects are artificial and changeable); epheme-
rality (freedom of entry/quit, which provides an opportunity to interrupt and resume the
existence of the organization). The transition from the real world to virtual led some scien-
tists to present virtualization as a paradigm for new changes, including organizational ones.
Virtualization of organizations is a social process, in the course of which the value under-
standing of the organization, its goals and functioning is rethought. In these conditions, of-
fice design, support for attributes, a certain kind of workers and the organization in which
it operates, corporate image and other “non-economic”, social and socio-psychological
aspects of the organization not only acquire economic content and become a commodity,
but also act as a systemic factor organizational development (Ivanov, 2000, p.19, p. 44–51).
The institutionalization of modern organizations involves the use of marketing techno-
logies that streamline organizational dynamics. Along with this, the role of harmonization
of the processes taking place in the macro- and micro-environment of the organization is in-
creasing. The adequacy of the organizational form of the social, the expectations of both the
staff and their external environment becomes a factor in the viability of the organization.
In 1991, American management experts Michael Hammer and James Champy (1997)
outlined the concept of business reengineering (the “revolutionary” model of change) in
basic terms. In their opinion, economic reengineering is a fundamental rethinking and
radical redesign of the enterprise and its most important processes. The result is a sharp
(by an order of magnitude) improvement in the most important quantifiable indicators of
expenditure, quality, service and timing (Hammer, & Champi, 1997).
Organizational development (“evolutionary” model of changes) is based on the con-
cept of planning, initiating and implementing processes of changing the social system
involving a large number of participants. From this perspective, organizational develop-
ment can be defined as a long-term, thorough, comprehensive process of changing and
developing the organization (enterprise) and people working in it.
In the context of these signs, it can be understood that any organization operating in
89
a market environment realizes two tendencies: functioning and development. If the func-
tioning is the maintenance of vital activity, the preservation of functions that determine
the integrity of the organization, qualitative certainty, essential characteristics (Kolesnik,
2009, p.13–17), then development is the achievement of a new quality, which determines
the stability of the organization’s activity, its growth.
So, classical concepts and definitions of organizational development proceeded from
the fact that the main task of organizational development specialists is to help the organi-
zation solve problems that hamper the effective use of human resources, create an organiza-
tional environment that promotes development and self-improvement of each employee of
the organization and achieves more successful and productive functioning of the organiza-
tion as a whole. In modern concepts of organizational development, the emphasis is on ma-
ximizing the integration of the individual needs and interests of employees, the goals and
objectives of the organization as a whole, as well as the creation of structures, systems and
processes that provide the opportunity for continuous improvement of the organization.
R. Marshak and R. Bushe (2009) note that organizational development combines
a greater emphasis on socially formed realities, the transformation of thinking and con-
sciousness, acting with multilingual realities, studying various images and assumptions
about changes, and the formation of general social agreements with multiple realities, held
by key constituencies. These accents, as a rule, lead to interventions and approaches that,
to varying degrees, emphasize the sequence, episodic and changing development; objective
diagnosis, as well as an emphasis on material processes, structures and awards. But more
attention is paid to the transformational changes achieved through changes in the indi-
vidual and systemic consciousness, which are partly based on constructive assumptions.
The importance of power and political processes in the process of establishing new
realities is also indirectly included in the new approach to organizational development,
given its set of basic assumptions. However, we believe that the role of power and political
processes should be more clearly defined and integrated into new practices of organizatio-
nal development (Bushe, & Marshak 2009, p.348–368).
Among organizations that have long and successfully implemented organizational
development programs, such world-famous corporations as Proctor & Gamble, General
Motors, Heinz Foods, IBM, Polaroid, The Royal Dutch Shell Group and many others.
Summarizing the existing theoretical approaches to organizational development it is
worth noting that:
⁃⁃ Organizational development is seen as a process of evolutionary or revolutionary changes
accompanying the functioning of organizations.
⁃⁃ Organizational development is seen as changes in the social environment of the organiza-
tion in terms of growth of personnel potential of the organization as a whole and individual
members of its workforce.
⁃⁃ Among the basic settings organizational development include the following provisions:
⁃⁃ organizational development considers the organization as an open living system. This means
that organizations do not exist in a vacuum, but constantly interact with their environment,
react to changes that occur in it, and adapt to them. As in nature, the strongest, and the
fittest, survive in human society. Today we can say with confidence that it is the ability to
adapt and is the first and most necessary condition for the effectiveness of the organization;
90
⁃⁃ the holistic approach to organization is another important setting of modern organizatio-

nal development. Today, organizational development practices not only help the organiza-
tion get rid of difficulties, they try to teach it to maintain an effective state on its own and
are constantly changed;
⁃⁃ since organizational development seeks to help an organization become a system, indepen-
dently renews and learns, involving employees in the process of organizational development
is an indispensable element of organizational development. Cooperation and mutual support
among the members of the organization is one of the most important components of the
successful functioning of the organization as a whole. By enabling people to participate in the
process of change, allowing them to make decisions that directly affect their work, we not
only reduce the resistance to change, but also create the conditions for maximizing the poten-
tial of each employee of the organization, increasing the overall effectiveness of its activities;
⁃⁃ people and their relationships at all levels of the organization – its main resource and
the main key to success. Organizational development works with individuals and groups,
paying special attention to the processes taking place between them. No technological, pro-
duct or structural innovation will be successful if the factor of interpersonal and intergroup
interaction is not taken into account in its implementation.
The role of organization management in organizational development Edgar H. Schein
(1990) described as follows. Over time, organizations develop a unique and sustainable
pattern of behavior or culture. Culture is defined as conjecture, beliefs and resulting be-
havior, the leaders come up or identify to solve problems in the external and internal
environments, and they teach new members the right way of perception, thinking and
action to solve problems (Schein, 1990, p.109–119).
Organizational development has the following main characteristics:
a) managing change processes;
b) introduction of psychological knowledge, in particular, from the sphere of behavioral psychology;
c) making changes in organizational culture;
d) expansion of organizational strategies, structures and processes to enhance organizational ef-
fectiveness;
e) introduction of long-term new forms of activity aimed at developing the potential of the indi-
vidual and organization (Wamwangi, 2003).
The basic settings of organizational development can be transformed into the imple-
mentation of the following principles:
⁃⁃ flexibility as adaptability;
⁃⁃ target direction;
⁃⁃ evolution;
⁃⁃ revolutionary changes;
⁃⁃ systematic.
Organizational development is based on several important ideas about the behavior of pe-
ople in organizations. Gerald Glover believes that today the practices of organizational develop-
ment must be thought globally and have a high cross competence. Without the experience of wor-
king in different cultures and the capacity for cultural adaptation, organizations can not match
the realities of the modern world. Thus, adaptation to different cultures is becoming one of the
most important tasks of modern organizational development (Gaponenko, & Pankrukhin, 2006).
91
Also, the problem area for organizational development today is the use of informa-
tion technology and telecommunications. Virtual teams are now becoming a fairly com-
mon way of organizing work, but they also face no fewer problems than traditional orga-
nizations, demanding modern approaches to determining organizational development.
Conclusions
The theory of organizational development acts as an effective tool in the management
of organizations. This is due to the following:
1. Increasingly topicality for organizations is the problem of rapid adaptation to changes in the
external environment, which can be solved by increasing the flexibility and adaptability pro-
vided by organizational development.
2. The task of motivating staff and building interaction between managers and executors is not
only due to the delegation of authority, but also through the development of the team as a full
participant in the management process.
3. The need to mobilize the efforts of the organization as a whole to achieve strategic goals, most
often, is realized through the organization’s acquisition of a new qualitative state.
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Chapter 7.
MANAGEMENT OF A GROUP OF COMPANIES
IN THE FIELDS OF: ACCOUNTING,
REPORTING AND CONTROL
Volodymyr Panteleiev, Kostiantyn Bezverkhyi, Abbas Mardani,
Maryna Ponomarova
Introduction
C hanges in the market environment require corresponding changes in the control

and maintenance of your business. Globalization is accompanied by a wide field
of public information on the activities of economic entities but also attempts of respon-
dents to strongly restrict access to internal (often hidden) information that comes to their
own security of companies from the effects of internal and external environment.
Accounting and control components of consolidation of companies and consolidat-
ed financial statements are the subject of research experts, interesting monograph are
known, development; it is seen at scientific conferences. The basic practical and theoret-
ical aspects of the consolidation of financial statements of companies (Golov & Kostyu-
chenko, 2004; Bezverkhyi, 2013; Panteleіev & Bezverkhyi, 2014), systematic information
needs of internal and external users reporting of Ukrainian companies, singled level of
standardization, the main stages of the consolidated of financial statements of Ukraine are
highlighted, disclosed purpose, information sources and how to fill all forms consolidated
financial statements (Panteleiev & Bezverkhyi, 2016).
It is believed that there are two options for consolidation: companies that form a sin-
gle financial Group, the structure – the principle of continuity when the Group is the
only family of single entity; and the share, by the autonomy of enterprises, the problem of
control of a subsidiary. In the presence of significant assumptions consolidated financial
statements are the result of conventional procedures over conventional numbers (Sokolov,
2005). Researchers consider the nature of the formation of corporate Groups, information
about the Group in the absence and presence of corporate reporting, the combination
methods, algorithms of consolidated reporting, conducting comparison between the op-
tions “uniting of interests” and “control purchase” (Kovalev & Kovalev, 2014). The national
legal framework provides for some of the consolidated financial statements and the fac-
tors that necessitated its drafting, the general procedure of preparation and presentation
of consolidated financial statements, the order of combining indicators of financial state-
ments of the parent company and its subsidiaries in the consolidated financial statements,
the rules of calculating and displaying share and minority inclusion in the consolidated
accounts indicators affiliated companies, preparation of explanations to the consolidat-
ed balance sheet and income statement (Dombrovskaya, 2008). International practice of
granting and the consolidated financial statements takes on material impact, the use of es-
timates investments at fair value method of proportional share data summary of a Group
member, the method of acquisition (purchase), and taking into account exchange rate
changes (Parushina et al., 2010; Bondina et al., 2017).
In academic journals there are summaries of financial (consolidated) statements (As-
takhov, 2010) although their content is different. In Ukraine manuals and textbooks on
training of accountants, financiers, economists singled out the preparation of consolidat-
ed and summary financial statements (Panteleiev, 2004; Suk & Suk, 2012; Bondar, Veriga
& Orishchenko, 2015).
Need for further investigation and disclosure of theoretical and applied principles of
consolidated financial statements in achieving enterprise managing a group in the industries.
For more than 100 years of preparing consolidated financial statements (the first time
such statements have been presented in 1903 and an approval of the bidders on the stock ex-
change) the information needs of users, particularly regarding disclosure of performance with
a view to achieving the objectives of the Group and the safety of its operation were satisfied.
In order to understand the history and causes of the Institute of consolidated finan-
cial statements, consider the genesis of its inception in the Table 1.
ТаTable 1. The genesis of the consolidated financial statements and the impact of large private
business and the financial market on its development
The period of
Time of origin
the practice of Distribution The presence
consolidated
No Country consolidated of large private of a developed
financial
financial businesses financial market
statements
statements
The end of the
1 USA 1920 high Yes
ХІХ century
2 United Kingdom 1920 1940 high Yes
3 Netherlands 1920 1940 high Yes
4 Germany 1930 1960 high No
5 France 1940 1970 Low No
6 Japan 1970 1980 high No
Source: Aliev, 2011.
As shown in the Table 1, the presence of two factors: a large private business and
developed financial markets – was the main factor for the emergence of the institute of
consolidated financial statements.
The need for the preparation of consolidated financial statements is caused by internal
and external objectives of its users. Internal users of the consolidated financial statements
are the top managers and the members of the financial and economic departments of the
holding. External users of the consolidated financial statements are owners, business part-
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Volodymyr Panteleiev, Kostiantyn Bezverkhyi, Abbas Mardani, Maryna Ponomarova
Chapter 7. MANAGEMENT OF A GROUP OF COMPANIES IN THE FIELDS OF: ACCOUNTING, REPORTING AND CONTROL
ners (contractors, investors, banks that provide loans, etc.) and public authorities. Load
of information forms of consolidated financial statements for external and internal users
are shown in Table 2.
Table 2. Organizing information requests of internal and external users of the consolidated
financial statements of Ukrainian companies
The consolidated Explanation of domestic
Consolidated cash
Number Users balance sheet and the and foreign receivables
flow statement
income statement and payables
1 Internal users Information about The information The information required
property and financial needed for forecasting for the implementation
position of the and analysis of and ongoing management
consolidated Group for cash flows for the of accounts payable and
demand management centralized financing holding coordination
purposes of holding internal holding payments
2 External users: Х Х Х
2А Owners Information about the Х Х
consolidated financial
income and its use
2Б Business The information The information Х
partners required to analyze needed to monitor the
the liquidity, financial implementation of the
stability and solvency forecast cash flow on
bank accounts
Source: Bezverkhyi & Bochulia, 2014.
1. Theory of consolidation
Integration processes in the economy, activation of secondary market securities, inten-
tion of improving the situation of companies in this market contribute to the formation of
entities within the parent (holding) company (PC) and subsidiaries (SC). Economic foun-
dation for companies’ association is the image of the Group as a single entity. The volume
and content of the information entities on their activities determined by the needs of users.
The specificity of the formation of the Group is that some companies are not combined into
one enlarged company and business is conducted through several legally independent com-
panies. The purpose of formation of Group is to increase equity capital and market value of
the company through management of Group companies to attract investment. Theory is ba-
sed on the consolidation of legal, organizational, administrative and other important prin-
ciples. When companies consolidate – stronger economic links between entities are forged.
The main provisions of the consolidation of the financial statements provided by Ac-
counting standard of Ukraine include the following. The key point of consolidation is to
control the activities of the member; can be direct or indirect control; given the right to
control the parent (holding) company. It is the subject of PC CFS presentation. Control
software acts as the initiator of formation of property, protect the interests of investors.
For the purposes of consolidation reporting at Group level in the accounting of imple-
menting the same for the whole Group accounting procedures. In forming a single Group
preferably accounting policies adhere to a uniform methodology of accounting for such
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transactions. Conduction of separate consolidated accounting is considered inappropriate.

Drawing CFS on the basis of the existing separate financial statements of PC and all SC
envisages special procedures: application of the fair value calculation of goodwill elimina-
tion of intercompany transactions (eliminating double counting), the accumulated capital
is established, uncontrolled share is determined, transformational tables are used, and etc.
The process of consolidation of financial statements involves implementation of time
consolidation; passing some consolidation steps, such steps are more than 10. The result is the
consolidation procedures set assembly Group report that includes consolidated report on the
Group CFS completed forms and application forms for reporting explanation. We use “stan-
dard” forms of CFS, annexed accounting standard of Ukraine 1 “General Requirements for
Financial Reporting” and methodical provisions referred as Accounting standard of Ukraine
2 “Consolidated Financial Statements” (The Ministry of Finance of Ukraine, 2013) and other
standards. The forms of such statements include: Consolidated balance sheet (statement of
financial position), form number 1-c; Consolidated income statement (statement of compre-
hensive income), form number 2-c; Consolidated cash flow statement, form number 3 c and
number for 3-cn; Consolidated statement of changes in equity, form number 4-c (National
Accounting Standard 1, 2013), and other forms, applications for forms and notes to the state-
ments. In some ways CFS open additional lines made appropriate explanation.
2. The main phases of the operation

The following are basic phases of operation (life) of the Group.
Previous most important phase. The initiator of the Group generates the idea of the
Group, expresses the idea of implementing a business project consolidation, creates a draft
business plan project, generates a business model of the new Group, identifies important
(significant) activities, defines parameters (scale) of the Group, estimates future profits
and losses of the Group, evaluates the company’s economic compatibility and control
capabilities, sets changes in the accounting for the preparation CFS, etc. The initiator of
the decision on the project – to create a Group of companies.
Phase 1. Identification of the new Group as a part of the PC and its controlled com-
panies; the investor acquires the company that receives SC status, receives the right to
control, recognizes goodwill, the financial system for the Group is formed, a strategy that
controls the schedule is introduced; the procedure for allocation of resources intra Group
is established, CFS of the first year of the first Group is being made.
Phase 2 continues the activities of PC and SC as a Group, estimated assets, liabilities,
equity, income and expenses, cash flows of the Group regularly formed and fed CFS.
Phase 3. An investor lost control of the Group, often in the market it will sell a sub-
sidiary under the rules of restructuring. From the date of loss of control PC over its SC
terminated recognition of all assets, liabilities and uncontrolled particle Group. Due to
loss of control established by the financial results of the Group at book value, the results
are recognized in profit (loss) of the parent company, the latest CFS of the date of loss of
control is produced.
Final Phase. Setting actual financial results (profit or loss) from the sale of the business
plan of the Group, by CFS, according to the years of operation. With the loss of power and
subordination relations between the SC and PC between former members, associations,
enterprises, joint ventures, etc, are possible.
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3. The place and role of the consolidated financial statements in achie-

ving the objectives of marketing and management
While highlighting the role of an information-providing marketing and management
of companies by CFS, it is appropriate to bear in mind that reporting is a “classic” ele-
ment of the method of accounting. Many company with subsidiaries and affiliates are
faced with the need to consolidate reporting under International Financial Reporting
Standards (IFRS). Unlike individual legal entity reporting, CFS gives the most complete
picture of the use of the investor or shareholder in the Group, as a management company
manages the resources given to it. CFS is important for investors and shareholders, as it
shows financial position and results of operations of the parent company and its con-
trolled enterprises (Groups), treating them as a single entity. It should be noted that there
is an increase in importance of consolidation procedures, as of 2013 in Ukraine there are
special forms of the consolidated financial statements.
However, widely known are facts of distortion, fabrication of financial statements. To
return the public confidence in the activities of companies and their statements can create
new initiatives and reporting requirements.
Over the reporting requirements of the Global Reporting Initiative (GRI) (Sustain-
ability Reporting Manual, n.d.), which formed at the beginning of XXI century, some im-
portant principles to ensure the quality of the report were indicated, for example, balance,
comparability, accuracy, timeliness, clarity and reliability. The quality of information en-
ables stakeholders to make informed and intelligent evaluation of and take appropriate
action. It is believed that the following principles will create the right conditions for re-
porting, but these are hardly enough to meet the requirements to ensure quality.
It is believed that consolidated financial statements should not be mandatory, because
the society and the state are accountable only to legal entities, and it often has a voluntary
or an advertising character (Sokolov, 2005). The Economic Community’s opinion on con-
solidation, as a whole, is positive. There is a certain level of consolidation (aggregation)
from the information provided. Extra efforts to provide detailed information are possible
as a result of this provision. At the same time, it is important to carefully treat the reser-
vation of the organization, consolidation could lead to significant loss of meaning, it may
not give particularly high or low results of activities in specific areas.
Information reporting is objective, it reflects the transactions of the company on real ac-
tivity of the subjects which it serves, it reveals their real life. It is worth noting the sensitivity of
financial markets to the content of the information contained in the financial statements. Data
posted in the financial statements, along with information for statistical bodies used when
performing operations on the stock exchange, the acquisition of controlling stakes in others.
4. Providing management team means business accounting, reporting

and control
For economic management, owners, the employees of the Group, society, the business
community are interested – what is the effect of the new economic union that is a Group
of PC and SC; were the association goals met, whether a formation is perspective, whether
to deal with businesses of the group, etc. From business practices it is known that there
is a real danger that the administration’s failed SC causes a significant risk of functioning
and can lead to “eating away” a capital of PC.
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Key moments in accounting procedures for the consolidation of the Group are: mapping
contributions as investments from PC to SC, presence of strict control by the activities of PC
SC and PC in the reporting of uncontrolled share. The main source of answers to the requests
of stakeholders on the level of economic security is CFS, based on accounting data, composed
by well-known principles and methods. It should be noted that it is meeting the needs of
market agents (concerned stakeholders), to have accurate information about the activities of
the Group by known economic forms of individual statements, but reformatted in CFS Gro-
up subject to relevant assumptions of its time, that were laid in the foundation of formation
of first consolidated financial statements and successfully passed check for a century.
The crucial principle of full consolidation is the consolidation of the management
Group of companies as an entity concept; business combination and the formation of
Groups is the method of acquisition; circumstances of the acquisition of control of the PC
under control now and the last entry status of subsidiary (SC) and others are established.
The legislator provided different availability status of integration processes, each of which
has its own part of the property (about power). Therefore, a share of uncontrolled mi-
nority interest, minority stake, is calculated; before it was called minority interests. An
alternative to the uncontrolled share is the share majority, majority shareholder.
An important component of total consolidated report is CFS corporate Group which
is a means of presenting the results of business processes within the Group, to highlight the
real financial status, information support, decision-making and more efficient investment.
Great importance in the Group is given to accounting and formation of CFS. The
role of the accounting parent and subsidiaries in the preparation of CFS, i.e. the absolute
value given to accounting as to the basis of consolidation of CFS. Consolidation serves
as a control of the PC side of the group businesses. CFS form a reporting for the date of
PC. CFS – is not a legally independent enterprise reporting. By analogy with the separate
financial statements of the Group, methods of intra management accounting and inter
corporative controls are developed.
5. A parent (holding) company – CFS nominator

According to the normative legal acts of Ukraine, consolidated financial statements
are submitted by companies, corporations (The Cabinet of Ministers of Ukraine, 2000),
companies holding (Verkhovna Rada of Ukraine, 2006) associates with the critical de-
pendence (Verkhovna Rada of Ukraine, 2003) of industrial and financial Groups and so
on. The agricultural sector accounts provide such agricultural holdings. The functions of
the holding company are to acquire a controlling stake in various companies in order to
establish control over the activities and generate income from dividends.
The initiator of creation of companies (real owner, Group leader) the parent (holding)
company (PC) as Voni patres familias – Latin. good fathers of families, controls one or
more entities, takes the initiative in business administration, is entitled to variable results
or variable returns from investment facility, deliberately makes certain risks for himself
and for subsidiaries (SC), must influence these results thanks to its powers. PC disposes of
controlled Ownership, is equity PC and SC-controlled share of participation. PC, in the
process of consolidationб acts as an investor, who controls the investee. Typically, the MP,
not only inhibits the growth of independence SC, but also strongly supports their devel-
opment. PC prepares and presents individual financial statements about their activities.
100
For the purpose of consolidated financial statements of Group PC, based on the under-
standing of the requirements of a single economic entity, said subsidiaries of timely and
fully getting them appropriate information for the preparation of consolidated financial
statements of the PC Group. The composition of such information is mandatory that all
the members of a single accounting policies of the Group; PC’s requirements may become
an alternative for preparation (reformatting) of the financial statements of SC according
with the same accounting policies of PC for the preparation of consolidated financial
statements. The information disclosed in the financial statements by PC filling in forms
of consolidated financial statements of the Group for the reporting period and the notes
to the consolidated financial statements.
PC, expecting to obtain economic benefits from the activities of enterprises and intend-
ing to strengthen the reputation of their Group, generates an idea (ideology, philosophy) of
the Group within its powers of drafting and implementing of the idea adopted by the business
community of the potential of all the activities of the Group. His intention PC realizes in the
reform for the sole intent of assets, liabilities, equity, income and expenses, cash flow and more.
Proponent conducts the necessary organizational, administrative, legal and other
measures for the development and operation of the Group. To manage a Group of com-
panies, authority of management is established; it determines individuals who make de-
cisions, powers of persons are established, rights of exclusion, rights of protection of the
interests of investors, control of the investee and others is established.
This authority is subordinate to the parent as a subject of the CFS presentation (re-
porting unit), it follows the common rules of corporate governance.
Authority management team ensures that all the members of a single policy in various
areas, such as unified marketing (commercial) policy, common industrial, economic, sci-
entific, technical and technological policy, unified pricing policy within the intra-Group
transactions, unified policy management (control policy), monitoring the activities of all
divisions of the Group unified information policy, a common security policy, a unified fi-
nancial and investment policy specifies the applicable financial reporting framework, uni-
form accounting policies, including the procedure for drawing up internal (management)
reporting, defines the format of the consolidated annual report the activities of others.
6. Responsibilities of the SC to PC in a Group

Subsidiary (SC), which is controlled by the parent (holding) company (PC) conscio-
usly participates in the Group. In pursuit of its interests in the Group, SC does only PC
controlled activities, with priority to meaningful (significant) activities to all SCs under
the control of PC, but reserves the uncontrolled stake. SC may do operations that are fo-
reign to the Group. SC prepares and presents individual financial statements about their
activities. However, SC must provide to PC appropriate information for the preparation
of the consolidated financial statements of PC Group.
Due to the fact that relations between members of the Group assumes the character
of investment subject and object management, investments within the Group are recor-
ded based on the reporting of financial results and net assets of an investment. That is, the
Group appears as efforts to implement corporate economic interests of particular compa-
nies; close links system is getting extensive development between different companies of
the Group, that is to form and strengthened intra-Group relations.
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7. Control of the Group

The concept of control is crucial in answering the question, can we consider the two
companies as a parent and subsidiary. Definition is controlled under IFRS 10 “Consolidated
Financial Statements” (International Financial Reporting Standard 10, 2013) and the pro-
visions of Accounting standard of Ukraine 19 “Business Combinations” (The Ministry of
Finance of Ukraine, 1999). Under IFRS 10, control of an investee – investor controls the
investee if the investor has the right variables on the performance of the investee or is re-
lated to risks and able to influence these results through its own power to the investee. For
Accounting standard of Ukraine 19, “Business Combinations” control – a decisive impact on
the financial, economic and commercial policy of the company or business to obtain bene-
fits from its activities. More important, to influence the activities of the Group, should be
regarded as the definition of control under the Law of Ukraine “On Joint Stock Companies”
(Verkhovna Rada of Ukraine, 2008): control – a decisive influence or the possibility of deci-
sive influence on the economic activity of the entity is carried out, in particular, through the
implementation of the ownership or use of all assets or a significant part of, the right of deci-
sive influence on the composition, voting results and the decision by the management entity,
and also any transactions that provide the opportunity to determine the conditions of eco-
nomic activity, to give binding instructions or perform the functions of management entity.
A parent company (PC) controlling SC, is interested in high results of its activity in
the Group. Therefore, it reformates financial statements of the Group to learn about the
achievements of the intended effect of economic Group.
Typically, control (authority) implies a property that is a direct or indirect ownership
of more than 50% of the voting potential (voting shares) of the subsidiary. Thus, the PC,
which has even 100% participation in the share capital is not doing SC’s consolidated
financial statements, if it in fact does not monitor the activities of SC. In this case, the
principle of accounting and financial reporting – substance over form, investment of PC
in SC is displayed by the equity method. In substance, control standards are dominant,
it is imperative basis of consolidation. In IFRS 10 content (subject, object) of control is
investee (International Financial Reporting Standard 10, 2013). Standards establish ex-
clusive control requirements, which are subject to authority, results and accounting re-
quirements. Consequently, an investor controls the investee if and only if the investor
actually has all three conditions listed below: powers on the investee; risks to be exposed
or has rights on variable performance of the investee; ability to use its powers regarding
the investee to affect the results of the investor. In addition, standards consider the loss of
control and the effects of such events on the accounting and reporting.
The standard also provides for permanent (even continuous) assessment control. To
determine whether an investor controls (PC) investee, the investor assesses whether it has
everything listed below: a) authority on the investee; b) is subject to risks associated with
variable results of the investee or has the rights on them; and c) the ability to use their
discretionary powers regarding the investee to affect the amount of income of investors.
Consideration of these factors can help to further determine the fact of the presence
of control: a) the purpose and structure of the organization and management of the in-
vestee; b) that there are significant activities and decisions on how these activities; c) do
the rights that the investor has guarantee his ability to manage important activities; d)
whether the investor suffers the risks associated with variable results of the investee or
102
whether it has the rights on them; or investor is able to use their discretionary powers re-
garding the investee to affect the results of the investor. In assessing whether control over
the investee, the investor takes into account the nature of its relations with other parties.
With the loss of control is no longer relevant and CFS is no longer needed. Restrictions
of environmental control over the investee are due to the fact that the real instruments of
influence on the object are in the form of investments, in addition, legal and accounting
framework of investment activity is currently available.
Accounting standards directly set priority on control of the consolidation: the pres-
ence of protection of the interests of investors is not a sign of control, n. 7 accounting
standard of Ukraine 2 “Consolidated financial statements” (The Ministry of Finance of
Ukraine, 2013) investor that has only rights of protection of the interests of investors, has
no powers regarding property investment and, therefore, does not control the investee,
IFRS 10 “Consolidated financial statements” (International Financial Reporting Standard
10, 2013). So we should distinguish control as part of the accounting and formation of CFS,
control over investee as the basis for the formation of the Group and strict control mea-
sures on security of the Group companies. The importance of smooth control is reflected
in the language of business, as a holding company in Spanish is sociedad de control.
In general, the goals of investors is to invest in securities that are usually limited to
the desire to achieve security, reliability and sustained profitability of investments, while
ensuring the liquidity of the purchased securities. That is vital for investors to guarantee
the protection of investment resources, their ability to generate income.
Responses to threats and challenges of the business environment is of particular se-
curity policy Group; in this case financial security is a form of security investments. In-
creased safety is reflected in actions, events, activities all of the protection that help to
reduce the threats, risks and more. There identifying threats (internal and external), their
assessment, prevention and neutralization of negative impact on the Group companies.
Important component of a secure information system is to protect official docu-
ments, that information internal appearance of closed internal management reporting,
implementation of internal quality standards for reporting information, including the
preparation of consolidated reporting, developed management accounting / controlling,
budgeting, intra standards, uniform accounting policies holding company, control and ef-
ficiency of accounting, economic analysis, expert services, intra control and audit, contin-
uous monitoring of threats and responses, and etc. Of great importance is data protection.
The decisive step is improving the safety system of ERP. ERP (Enterprise Resource
Planning System) – an integrated system based on information technology to manage in-
ternal and external resources of the company. Implemented in the ERP is a system of
access to information, intended (in combination with other measures of information se-
curity company) to counter both external industrial espionage and internal (e.g., theft).
Progressive investment focus is financial innovation – new schemes of financial trans-
actions or new financial instruments in implementing the financial management practice
to reduce financial risks, reduce costs and increase revenue.
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8. Internal control and risk of operation

Other than CFS standardized forms, it contains significant information notes to the
statements. Due to the fact that under IFRS 10 “Consolidated Financial Statements”, es-
sential for controlling investor property investment is that the investor (PC) has the au-
thority on facility investment in the notes to CFS revealed: initiator of creation; authority,
the nature of governance, PC Group controls, reporting controls, corporate governance
code of the Group, time of formation of the group and moment (date) of loss of control,
SC acquisition date, control bodies of others.
Whereas by IFRS 10 “Consolidated Financial Statements”, essential for controlling
investor property investment is that the investor (PC) has the ability to use its powers re-
garding the investee to affect the results of the investor, notes to the consolidated financial
statements disclosed the contents of internal controls.
Table 3. The main provisions of internal control, the Principles of Corporate Governance
of Ukraine
Elements of
Content of elements
internal controls
Ensuring the management of financial and economic activity of Group, detect and
The purpose of
correct deficiencies of the control system to detect and prevent unwanted variation,
control
reducing the risk of internal control
Subjects of The Supervisory Board of Group and companies, the executive body of the company, the
control subjects of internal control, external (independent) audit
The Supervisory Board, the Audit Committee of the Supervisory Board, Audit
Subjects of
Committee, internal audit (internal auditor) Commission inventory, accounting,
internal control
department of standard control, technical control department etc.
Financial and economic activities, the results of financial and economic activities, the
effectiveness of management, proper documentation providing investment stake, real
elimination, tabulation consolidation, the balance of mutual debts, acts of reconciliation,
Objects of
adherence to uniform pricing policy within the internal Group operations, organization
control
and the system of accounting, compliance of accounting the actual availability of assets,
their proper preservation, the liabilities, the reliability of information, accuracy of
financial statements
Control Inspection, examination, review, monitoring and evaluation activities, analysis, testing
methods
Availability and policy compliance monitoring, reporting on the activities and the goal
of the Group and company, to develop recommendations to improve performance, test
Elements of
performance, test implementation of control policy, the establishment of criteria of
the monitoring
internal control, establishing criteria for competence of persons who exercise control,
mechanism
Requiring candidates for the internal control of ethics, competence and professional
skills, control deficiencies identified internal control subjects
Source: Principles of corporate governance of Ukraine, 2008.
Table 3 using the requirements of Corporate Governance Principles of Ukraine appro-

ved the State Commission on Securities and Stock Market of Ukraine of 24 January 2008
No 52 (Principles of corporate governance of Ukraine, 2008) the foundations of internal
control that are reflected in the Notes to the consolidated financial statements were deter-
104
mined. The main elements of internal control are considered to be: objective control sub-
jects, objects of control methods and control mechanism. The report on the state control
bodies and PC reveals the organization control Group; control authorities and organizing
PC, authorities and organization of control, etc. SC. In compliance / non-compliance of
the enterprises of the general provisions on internal control can evaluate the control sys-
tem in the company.
As per IFRS 10 “Consolidated Financial Statements”, essential for controlling inve-
stor property investment is that the investor (PC) undergoes risks or entitled variables on
the performance of the investee (SC) in the notes to the consolidated financial statements
the contents of the risks are disclosed. This object management Group singled out three
categories: risk Groups; parent risks, risks associated companies. Table 4 requirements
using Corporate Governance Principles of Ukraine approved the State Commission on
Securities and Stock Market of Ukraine of 24 January 2008 No 52 (Principles of corporate
governance of Ukraine, 2008) brings up the basics of risk management businesses that
are reflected in the Notes to the consolidated financial statements. The main elements of
risk management are considered accepted objectives of management, subject and object
management, management mechanism. In compliance / non-compliance in enterprises of
such general regulations on risk management can assess the risk management system in
the company.
Table 4. The main provisions of company risk management, on the principles of corporate
governance of Ukraine
Elements of Risk
Content of elements
Management Company
Managing risk, reducing intra / internal risk, reducing the destructive
The purpose of Management impact of internal conflicts in the Group, removing the causes that hinder
the further existence of Group
Entities of Risk Management Supervisory board, Auditing committee of the supervisory board.
The internal and external environment, the results of financial and
economic activities, the system of internal control, efficiency management,
Objects of Risk Management
reliability of information misstatement of the financial statements, internal
conflicts in the Group
Classification of risk profiling risks, availability and compliance with
risk management policies, reporting on the activities of Groups and
Elements of risk companies and risk assessment, risk reduction internal controls, develop
management mechanism recommendations for risk management, check the efficiency of the Group
and the companies of the implementation of risk management policies,
monitoring deficiencies identified subjects of risk management
Source: Principles of corporate governance of Ukraine, 2008.
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9. Example of use of practical business model for the consolidation of

conditions of formation of a new SC
The experience of renowned companies on successful innovation in new markets,
product promotion in the higher sectors at the beginning of XXI century, is known. The
study was conducted in Example of 5 sectors: aviation, education, semiconductor ma-
nufacturing, public health and telecommunications.
This experience has allowed researchers to establish the role of SC, which a leader
creates (initiator) Group (PC). The leader of the Group conducts its own trade policy,
gives new subdivision freedom in the required areas gives new competences, the necessary
resources and procedures, gives plenty of space to maneuver, allows to produce their own
values, using their own independently chosen mode of preparation, successfully solves the
inevitable internal conflicts and others. Improving the Group’s financial system, before
the issue of shares to the public, the company ExpressJet (its flights are operated under
the name Express) was a subsidiary of Continental Express, which owned all the shares of
ExpressJet. Now the property of Continental is 55% of all shares of ExpressJet.
Under competitive conditions, new beginner company units (but without the bright
image) without the burdensome debt create an effective push to capture new market seg-
ments. At the same time, the available points of risk: the possibility of conversion of SC
to a copy of PC, SC can be limited in innovation support, rather than productive, but also
more aggressive innovations, ultimatum compliance to “Group” structure costs, project
approvals by known criteria, mandatory requirements for immediate rapid growth can
lead to failure, how to keep a new division within, without undermining the core business.
The important role goes to control (monitoring) of the implementation of the project
consolidation. Leader – recognized company that begins to capture new market segment
and provides direct control over the activities. With a full control of the corporation got
more room for experimentation. Introduce a strategy that is monitored, that is – a strategy
that is imposed from above, the project is developed and implemented under the supervi-
sion of senior management [Group]. Under integration, company controls the stages of val-
ue creation that are associated with the architecture of the product / service. Full integration
– a whole chain cover education costs, including the production and sale of the product.
Partial integration and operational integration are also possible (Christensen, Anthony &
Roth, 2016). Allocation of resources inside the group is a procedure by which the company
distributes its resources between projects. The process of allocating resources should diffuse
structure, it is difficult to control – because it includes the location of such decisions many
employees conduct themselves. Top management directly controls only a few decisions on
the allocation of funding. But other resources are allocated according to certain priorities:
some projects get resources from other (Christensen, Anthony & Roth, 2016).
Accounting balance, [and more – CFS] refers to researcher’s material resources which
the company has access to (Christensen, Anthony & Roth, 2016). Evaluation of the project
is carried out according to statements of all activities including CFS. It should be noted
that the examples presented by Groups not only US but also European Groups.
In order to obtain reasonable response to the business environment and economic man-
agement required analysis of financial statements as certain forms of consolidated accounts,
and so the entire set of reporting for different periods and in different stages of Group life.
106
10. Unfixed issues

You can set the main unfixed issues of theory and practice of consolidated financial state-
ments: real separation of investors powers and rights of protection of the investors interests, it
is important not only in the formation of the Group, but especially important during Group
activities; in the reporting of the original aspects of the corporate Group; issues of control over
policy investor (control actions, objects control test execution control measures, measures
of policy implementation, setting the date of loss of control that is the date when the group
ceases to exist and the parent (holding) company has not submitted the consolidated financial
statements) under control through the issue of shares to overcome disregard the principle
of priority of substance over form, ignoring the real form controls that do not receive for-
mal confirmation through shares (Sokolov, 2005); introduction of internal corporate controls
in the Group, setting standards that are used for comparison, the establishment of similar
/ dissimilar operations, effective management of corporations / associations, determine the
applicable financial reporting framework (accounting basis) adopted by management, which
is appropriate given the nature of entity and purpose of financial statements or required by
law or regulations based on accounting policies, accounting assessment procedures, including
the procedure for drawing up internal (management) consolidated reporting of the Group,
coordination in the calculation of the various activities of the Group, especially when they are
far different, approval of the inventory and display of the results in accounting and reporting,
transfer reporting members by national standards into a single consolidated accounts accord-
ing to international rules, definition of format of a consolidated annual report on the activities
of the Group, disclosure of the level of risk and internal control of others. The lack of uniform
accounting policies or ignoring in practice the differences in accounting policies, forming the
analytical section display operations in the Group. Search for alternative methodological ap-
proaches to consolidation, in addition to valuation differences (Golov & Kostyuchenko, 2004).
For effective consolidation, terminological gaps should be overcome, for example, to
determine control. If by IFRS 10 investor controls the investee, if he is entitled to a vari-
able performance of the investee or is related to risks and able to influence these results
through its own power to the investee that has a combination of accounting and manage-
ment issues related to investment activities of the investor, then P (S) 19 control is con-
sidered a decisive influence on the financial, economic and commercial policy of the com-
pany or business to obtain benefits from its activities. Also, important concepts require
the disclosure of the content: the consolidation procedures (technology) consolidation,
consolidation methods, content control intra-organization, consolidated financial state-
ments (CFS), content consolidation parameters (the book value of investments, goodwill,
uncontrolled share, etc.) consolidation schedule, the single business unit, entity concept.
It is appropriate to further establish in the reporting of social (environmental) investment
options and reporting on corporate social responsibility of Group of companies.
Conclusions
In Ukraine, as in other emerging free market economies, it is acknowledged that
consolidation in the broad sense is needed when creating associations, holdings in the
taxation of business entities in accounting budgetary institutions and others. The most
dynamic concepts associated with consolidation, developed to consolidate the financial
statements of a Group of companies.
107
Business development, the emergence of large private business and developed finan-
cial markets, satisfaction of information requests of internal and external users of the
consolidated financial statements requires the use of new trajectories of governance, inc-
luding the consolidation of companies. Procedures of consolidation, in practice, are based
on the principles of the theory of consolidation. Reporting on the activities of companies
provides the necessary information to achieve the goal of companies. In Ukraine, the sta-
te requires mandatory compilation and publication of consolidated financial statements
(The Cabinet of Ministers of Ukraine, 1999; 2000). Fundamentals of consolidated financial
statements of Ukrainian companies are based on its own regulatory framework, and so
on the basis of experience of international business, including new initiatives and repor-
ting requirements.
The effect of the union is manifested in the capture of new market segments, develop-
ment of new products and values, expansion of a spectrum of activities (milit. – Springbo-
ard) of companies of the industry and other industries in which the company of the Group
is operating, meeting the needs of new Groups of users of products, promotion of new
innovative products, increasing equity, the possibility of attracting new investments, use
of domestic prices and the effect of delivery and reliability payments for raw materials and
components, increased safety of Groups and others. Subsidiaries included in the Group
may be the current actors of the market, as well as new, that have the status of SC when
creating Groups.
Imperative factor in the consolidation as a business project is the parent control that
protects the interests of investors. Control differs as part of the accounting and formation
of CFS, control of the investee as a basis for the formation of the Group and strict control
measures security of the Group companies, a strategy is introduced, that is controlled,
there are facilities that are under the direct control of the PC. Control may be direct, intra
full control and audit, and others.
Based on the information of Consolidated Financial Statements competent body of
the Group management decisions are taken for the implementation of the strategy, the
contribution of individual SC in the case of the Group, resource allocation within the
Group, forming a unified structure of expenditure, implementation of uniform pricing
policy within the Group operations.
The consolidated financial statements have further information which removes the
limitations of the individual financial statements of the Group, is an independent infor-
mation resource because it contains original performance, reliable information about the
Group as a whole. The preparation of the consolidated financial statements using account-
ing data of all companies that have been aggregated by the parent (holding) company.
Operations of formation of consolidated financial statements is the confirmation of the
importance of reporting as part of a method of accounting, they are in the nature of in-
vestments, expanding the concept of accountability, enhanced accounting principles sub-
stance over form, the role of a single accounting policy is the construction of performance
reporting, some indicators, but also the use of special accounting and settlement opera-
tions, instructional techniques, it is an example of harmonization of national normative
legal acts of Ukraine with international accounting standards and financial reporting,
creation of a new accounting object – transactions between Group members and third
parties, new accounting tools are developed.
108
The consolidated financial statements show assets, liabilities, equity of the parent
(holding) company, uncontrolled share participation, income, expenses, cash flows from
transactions with third parties. Reporting is regarded as a category in which the Group
has access to. Such reporting functions as an important part of the report of Group.
Consolidation procedures are reflected in the practice of auditing, monitoring, ac-
counting, analysis; they are the subject of research and a training discipline in the specialty
“Accounting and Taxation”.
References:
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international financial reporting standards. Dissertation for obtaining a scientific degree of candidate
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110
Chapter 8.
THEORETICAL FOUNDATIONS OF
ACCOUNTING OUTSOURCING IN UKRAINE
Olena Moskalenko, Roman Piskunov, Veronika Kostyanyk,
Halimah Mohd Yusof
1. Background of the formation and development of forms of organiza-

tion of accounting
U nder present-day conditions of competition business development depends on

effective asset management, in particular, by the maximum concentration of re-
sources on the core business of the organization. However, as a rule, almost all organiza-
tions are burdened with non-core, but not less important for its functioning of services.
These departments include accounting, where all the important accounting processes
are carried out, beginning with the organization of bookkeeping in the company, and
finishing with all accounting transactions control.
The organization should not spend efforts to conduct non-core processes for its effec-
tive and seccussfull operating and growth. This aim can be achieved through the withdra-
wal of non-core processes to outsourcing (from the English «outsourcing» – application of
other resources) (Pisarchuk, & Strukova, 2010). Outsourcing is a technique that has been
widely used to reduce cost and time of a firm. The outsourcing is also expected to give
firms more concentration on their main activities (Aman, & Zaidah, 2011).
The term outsourcing determines the transfer of responsibility for conducting inter-
nal processes to an external services provider.That external provider may or may not be
located in a different country than its customer’s headquarters. Finance and Accounting
Outsourcing (FAO): The outsourcing of one or more finance and accounting activities or
processes (Krell, 2007).
Outsourcing of accounting services is fairly new service in Ukrainian market. Outso-
urcing helps to entrust execution of difficult task to more competent employees, whose
firm customer does not have in a staff because of narrow-purpose of these professionals.
This service helps firm with saving time and money for the maintenance of accoun-
ting staff. Thus outsourcing of accounting services helps company management to devote
more time for business development, to avoid a number of problems, which are related
to hire experienced accountants. Especially popular accounting outsourcing is among the
foreign companies that have just come to the Ukrainian market and require bookkeeping
by Ukrainian specialists. Vital issue of enterprises adaptation to the market environment
is application of outsourcing (Outsourcing an accountant: to be or not to be?, 2013).
The aim is generalization of existing approaches to defining the essence of outsour-

cing, its types and forms, also exploring advantages and disadvantages of outsourcing for
internal enterprises. Studied the order of distribution of responsibilities between external
subject and customer in the outsourced management accounting, formation of service
cost accounting on a contractual basis.
The system of accounting in various countries has developed under the influence of
various factors, many of which were caused by a historical development and mutual influ-
ence. It understands that the form of accounting is the set of accounting records, which
are used in sequence and interaction of accounting with application of double entry.
The form of accounting bookkeeping is an important part of one of the stages of the
cycle accounting. Some combination of chronological and systematic bookkeeping, ap-
propriate forms of communication between registers, the method and equipment of entries
– all these determines the form of accounting bookkeeping. Under current legislation the
company determines the form of accounting, i.e. the form of accounting is the subject of an
accounting policy and must be indicated in the Order of accounting policies (Struk, 2008).
During the existence accounting bookkeeping applied different forms. Nowdays the
more common forms of accounting are journal-order form, simplified and automated
(computerized) form of accounting.
Along with existing forms of accounting a new form has appeared, which today is called out-
sourcing. In internal practice, the implementation of this form of accounting takes place through
the application of external experts (specialized companies) in accounting sphere (Didukh, 2013).
Accounting outsourcing has the following advantages:
⁃⁃ savings in payroll to accounting stuff;
⁃⁃ saving on the cost of organizing jobs in accounting, software, training staff, access to quali-
fied online consulting, internal quality control, improve the quality and reliability of the
functions company-outsourcer.
About disadvantages of accounting shortcomings outside the enterprise evidence
such facts as:
⁃⁃ leadership fears that confidential information fall into the “wrong hands”;
⁃⁃ lack of direct control over the drafting and submission of reports;
⁃⁃ lack of awareness about the professional level of specialists, who engage accounting in a
company (Sinitsa, 2014).
Also is possible a decline of the functions quality that were transferred to an outside or-
ganization through unfair accomplishment or unprofessional of outsourcer. Often such con-
ditions are markets features, where there is not good competition that is dominated by one
outsourcer, which is a monopolist. In addition to the current economic conditions of far-
ming in Ukraine there are several factors that prevent the accomplishment of outsourcing:
⁃⁃ lack of available financial resources to invest in new management technologies;
⁃⁃ lack of knowledge of firm subjects about the experience of outsoursing application, outso-
urcing services market, particularly in accounting;
⁃⁃ lack of legislative mechanisms regulating partnership relations with outsourcing, in ad-
dition, Ukraine is not yet fully formed culture drafting of contracts, which in turn leads to
a fuzzy understanding of the responsibility of the parties.
112
Olena Moskalenko, Roman Piskunov, Veronika Kostyanyk, Halimah Mohd Yusof
Chapter 8. THEORETICAL FOUNDATIONS OF ACCOUNTING OUTSOURCING IN UKRAINE
Accounting outsourcing is a special case of business processes outsourcing and it is

a way to ensure the accounting of the company. It provides imposition functions related
to organization, accounting and reporting in the enterprise outside the company transfer
them to perform by outsourcer. Unlike accounting services provided by external contrac-
tors, accounting outsourcing is a form of interaction where some foreign company is inc-
luded in the working business processes of the customer as a single functional unit, while
remaining organizationally and legally independent.
Today in Ukraine the feasibility of transition to accounting outsourcing is determined
primarily by the possibility of involving outer sources of a specialized financial institution
(outsourcer) and thus the reduction expensive and temporary expenses on accounting. It
is possible owing the so-called «scale effect» – an outsourcing company usually keeps ac-
counting of several organizations, thus reducing its share of conventionally fixed costs for
each client and, consequently, the total cost of the services of the organization (Kutuzov,
& Kotsiuba, 2015).
There are two types of accounting outsourcing. The first type involves conducting
all the bookkeeping, the second – the transfer of functions in some areas, such as records
of fixed assets, payroll. Kafka S.M. identifies four types of working with the customer
in accounting outsourcing: full outsourcing, partial outsourcing, external controller and
customer service. In the first model, “Full outsourcing” customer transfers all functions
from accounting to outsourcer. This model is suitable for all types of enterprises. The
second model “Partial outsourcing” is suitable for larger companies where there is a staff
accountant, accountant autsoser can perform only some non-core functions (verification
in some areas of economic activity, maintaining personnel records, account for individual
projects, thereby freeing up some time of staff accountant). For small businesses that can
not afford a full-time accountant, outsourcers can help make statements. In the third mo-
del of “External controller», outsourcer verifies accounting documentation, analyzes the
work of the enterprise and draws a conclusion on how to improve operations. The fourth
model is “Customer service”. In this case, the outsourcer serves as a consultant, informs
the customer about innovation and other issues. Of course, mixed ways of cooperation
outsourcer and the company are admitted. For example, complex accounting issues are
given to outsourcers to unload a staff accountant, who executes daily operations at this
time (Kafka, 2013). Nowdays, many companies pursuing different objectives, increasingly
showing interest to outsourcing. Large companies, which include units of subsidiaries in
different regions, want to facilitate the preparation of consolidated reporting and mana-
gement. In this case, a company that provides services from an external accounting provi-
des collection and centralized processing of information for all business groups. Medium
and small enterprises which want to build a transparent system of accounting, including
systems on the basis of IFRS and implement effective internal control and management
accounting, are interested in attracting qualified expert with experience in the Ukrainian
financial and tax accounting, IFRS, internal audit and budgeting.
Today the practice of accounting services assignment by some outside party in the US
and in most European countries is put on stream. Many large companies generally refused
from keeping their own accounts.
In the US and Europe there is a very high degree of accounting outsourcing market
and it allows companies to deal with the main activity, transferring tax accounting, as well
113
as other issues of accounting bookkeeping to professionals. Thus, in the US outsourcers

services use 92% of small and medium-sized businesses, in Europe – 86%, in Israel – 96%.
An example of the transfer of the business process for accounting vision is a world-
-known oil company British Petroleum, which is spent over 10.5 bln. Dollars during the
transition to outsourcing, with an annual contract value is about 1.5 billion. Now it is the
largest and most long-term agreement on outsourcing market in the world.
By the results of the research «Yankelovich Partners», conducted in 14 countries, 63%
of respondents confirmed, that they transferred one or more non-core functions to the
management of contractors. Of those who made the outsourcing, 84% were positive min-
ded and claimed that they satisfied by work of outsourcing companies.
The analytical firm «Nelson Hall» argues that outsourcing market of business proces-
ses is actively developing and that the total amount of contracts in the third quarter of
2014 increased by 26% and in the first nine months of 2014 the increase was 54%.
World practice and successful solutions encouraging the outsourcing of accounting in
our country. The number of companies offering accounting services in Ukraine is incre-
asing every year. However, this growth is ensured by stability of demand and shows the
need, the prospects for this type of service. The majority of leading economists and finan-
ciers in Ukraine suppose that our country has potential for outsourcing leap, there are pre-
requisite for its explosive growth, but there are limiting factors, which include the general
economic situation, business models, lack of long-term contacts and professional staff.
The key conditions of the growth in the outsourcing market is economic stability,
availability of tax legislation, strategy of country, of large companies and, accordingly,
other businesses. And when the situation in the country changes, then the market will
show explosive growth.
Fig. 1. Factors, which cost of accounting outsourcing depends on

114
Today in Ukraine accounting outsourcing services is often used by private entrepre-

neurs, small businesses and companies that were opened recently. According to experts,
their number – about 40% (including services of private accountants). Enterprises of large
businesses that use the services of accounting firms around 5%. But if till 2012 among legal
entities was noticeable trend in increased demand for these services, now experts fix a
recession. What is not said about entrepreneurs, where accounting services are in steady
popular demand. According to the head of accounting outsourcing Corporation “Global
Consulting” Natalia Mormul this is primarily due to the regular changes of the Tax Code,
which entities had the right to work with private entrepreneurs without loss deductible
expenses. In this regard, many companies moved their business to private entrepreneurs
where bookkeeping is simplified and rates of taxation are much lower.
Cost of accounting outsourcing depends on a number of factors, which are listed in Fig. 1.
It is appropriate to note that the cost of services is approximately equal to the wage of
full-time accountants, and in some cases is even below it.
For a visual comparison there are costs for qualified chief accountant at the medium
company per month:
⁃⁃ wages – 4 000,00 UAH;
⁃⁃ taxes – 1 700,00 UAH;
⁃⁃ rent, organization of workplace– 550,00 UAH;
⁃⁃ chancery, specialized literature, legal framework, software – 300,00 UAH;
⁃⁃ training, seminars – 50,00 UAH;
⁃⁃ amortization of computer and office equipment – 150,00 UAH.
Hereby, the cost for one accountant will be about 6 750,00 UAH. And the average cost
of services from 1 500,00 UAH., but also the additional costs with outsourcing must be taken
into account. Besides payment for outsourcing services is flexible, as price varies depending
on changes in the enterprise, and it is very attractive for beginners and seasonal business.
Having made the analysis of positive and negative aspects of outsourcing, it can be
recommended in the following cases:
⁃⁃ the accounting in your company is pretty simple, with standard operation;
⁃⁃ if the company heeds to prepare «zero» reporting – this is absolutely routine accounting
work. If you have complex or specific activities, you need to «grow» your own accountant
or seek an accounting company that specializes in your specifics;
⁃⁃ if retraining of your accounting department (e.g. during the transition to international
standards) will be more costly than the transfer of accounting in the enterprise to outsour-
cing (Kutuzov, & Kotsiuba, 2015).
2. Users of accounting outsourcing services and criteria for selecting an

external entity accounting
Among the customers of accounting outsourcing the majority of enterprises with fo-
reign investments, which required additional guarantees of qualitative bookkeeping. Also,
companies, which faced with cases of theft or fraud, untimely reporting and payment of
tax obligations from the “stationary” accountants are active consumers of those services.
Investors may be interested in outsourcing in order to create a system of independent mo-
115
nitoring and providing of economic security of obtaining business by means of accounting

services from professionals.
The most popular service of accounting outsourcing experts call the “turnkey”, which inc-
ludes accounting and tax accounting, submission of reports to all regulatory authorities, wor-
king with client-bank, control the payment of all tax obligations, support all kinds of inspec-
tions, communication with control bodies, archiving and storage of documents and others.
According to accounts of specialists accounting outsourcers services are used by about
5% of Russian firms, 15% of Polish, 34% of American. Now in Ukraine over 5% of Ukra-
inian enterprises of large and medium businesses doen not have a accountant position in
staff, and more than 60% of small businesses use accounting outsourcing, and a tendency
to increase the percentage of companies using outsourcing is growing rapidly. Among
Ukrainian companies, which use outsourcing and consulting, primarily pharmacological
enterprises (10%), manufacturing industries (12%), other enterprise areas (15%).
Accounting (outsourcing) is currently one of the most common types of audit servi-
ces, and takes up 30% of total work of audit firms. The list of services that can assist audi-
tors (audit firms) is determined by the Audit Chamber of Ukraine according to auditing
standards. Audit firms provides services for accounting and reporting in accordance with
the requirements of Ukrainian accounting standards and legislation. Accounting or re-
porting is also possible in accordance with International Financial Reporting Standards.
These services may include the following:
⁃⁃ checking received primary documents and their reflection in the accounting system. To do
this the most common accounting software are applied (1C “Accounting», Microsoft Navi-
sion, SAP, and others.);
⁃⁃ preparation of financial reporting in accordance with Ukrainian accounting standards and,
if necessary, in accordance with IFRS (International Financial Reporting Standards) or US
GAAP (Generally Accepted Accounting Principles US). Carrying out these checks accoun-
ting (reporting), generated using different accounting standards (reporting);
⁃⁃ preparation and submission of mandatory statistical reporting;
⁃⁃ development and implementation of accounting bookkeeping policy for enterprise;
⁃⁃ calculation of deferred tax;
⁃⁃ communication and carrying out checks with counterparties, gathering of received primary
documents;
⁃⁃ execution of domestic primary documents (registration of mission, travel letters, writing off
and movements of inventory holdings, etc.);
⁃⁃ treasury services (administration of bank accounts – preparation of bank payment orders
and / or requests for payments required, and communication with maintance banks).
The scope of functions that can be transmitted within outsourcing is the subject of
an agreement between the parties and may include keeping separate accounts or book-
keeping in whole or assistance in the preparation or direct preparation of accounting
and tax accounting, preparation and submission of statistical information to the relevant
authorities and other.
The development of outsourcing accounting services generated, as usual, a large num-
ber of accounting companies. It is quite natural that potential customers have difficulties
with choosing an accounting company which is able to solve the required accounting issues.
116
First of all, a potential customer need to understand that the choice of accounting for
his organization, it is quite serious deal and it would be wrong to focus only on the cost of
accounting services. Consider some characteristics that are passed by some customers, but
which may affect the quality of accounting services yhat are rendered.
Basically, it is believed that a company providing accounting services, should work
out on market of accounting services at least 4–6 years. But few people think that young,
energetic accounting company may well compete with the company, which has experience
over 6 years. Because of experience, primarily determined by experience and length of
service professionals who work in this company, and not all proffesionals are ready to
work in the same company for over 6 years. It is better to know exactly who will lead the
accounting department, and ask this specialist about experience.
Choosing accounting company consumer should ask the company is professional re-
sponsibility insured or not. If the company only plans to insure professional responsibili-
ty, it will be better to include in the contract for the allocation of accounting services the
item which will assume all expenses in case of an error.
In pursuit of profit, some accounting companies burden more organizations with
professionals. The fact that it is very difficult for one specialist correctly and accurately
maintain accounting bookkeeping of more than 4–6 average operating organizations. So
ask how many organizations specialist is keeping.
The oftener specialists of accounting companies have advanced training, attend semi-
nars and trainings is better for you. This is an additional guarantee that specialists will be
aware of any kind of changes which are necessary for the accounting bookkeeping.
The presence of the accounting professional (department) in stuff, protecting the in-
terests of clients in tax, government agencies, courts is simply need to resolve arising
disputes from public authorities, tax offices and so on. Plus presence such professionals in
stuff is of timely monitoring legislation.
Not all accountaning companies in their list of preferences specify as point as security.
Although it has been known long ago that security is almost the key moment for potential
customers.
Security should include follows: limit access to the premises where documents are sto-
red, accounting cabinets and limit access to them, computer security, fire safety systems
(accounting company in case of fire, can attribute it to force majeure).
Privacy is a very important point when it comes to accounting, and one of the most
not provided. Although the contract for accounting services typically prescribed privacy
policy, few companies conduct and control it. Only if we turn to the accounting company
and sign a contract, there is at least some spelled warranty.
Whereas differentiation of approaches to the selection of an external entity for acco-
unting and variability models of collaboration, the main phases of selection of external
business accounting are:
⁃⁃ establishing requirements for accounting in the enterprise;
⁃⁃ the decision to use accounting outsourcing;
⁃⁃ taking the decision about application of accounting outsourcing;
⁃⁃ negotiation and agreement on the provision of accounting outsourcing
117
The general terms of contract execution that generate business obligations, common pro-
cedure for execution business contracts, order changes and cancellation of business contracts
specified in Chapter 20 “Business contracts” of Business Code of Ukraine of 16 January 2003.
These requirements are common to any agreement which falls within the definition of busi-
ness activity. According to the Civil Code of Ukraine of 16.01.2003 № 435–IV in section II “The
general terms of agreement” there is definition of concepts and types of contract, content,
typical conditions, term, price, form of contract. An account of outsourcing in the legal sense
is service that grants certain activities to staff to carry out for the benefit of the company-
-customer for the execution of the outsourcing relationship used construction of civil – legal
contract about recoverable allocation of Service. Recpectivly with L.S. Skakun, she considers
keeping of accounting on a contractual basis “as a set of relationships that are formed between
the customer and executor of services and fixed in the relevant contract which provisions aim
at the establishment, modification or termination of rights and obligations of the parties”.
Because, from a legal point of view, agreement and contractual relationship are the foundation
of external accounting entity, there is a question about the correctness of the identification
of “keeping accounting on a contractual basis” with the term “succession”, given the fact that
“outsourcing” translated from English as “conclusion of a contract by external companies”. The
common features are attracting of external entity to provide the services, contractual relations
between entities, the need to protect confidential information. But the degree of fundraising
of executor, the scope and the need to change organizational structure of enterprise indicate
the need for differentiation of these concepts. Relations arising in the provision of staff are not
regulated at the moment by Ukrainian labor and civil law. Only Article 628 of the Civil Code
of Ukraine, which allows conclusion of any agreements that do not contradict the current legi-
slation makes possible conclusion of contracts for the provision of staff (Skakun, 2008). Parties
also may conclude mixed contract, which may contain elements of various contracts. There
are certain differences between contracts for accounting with private entrepreneurs and en-
terprises. Relations arising in providing to staff with enterprises are more complex form of
contractual relations. Quite a difficult part with this provision of accounting is trilateral re-
lationship: relations between the company-customer and the outsourcer-company – are civil,
and between outsourcer-company and executors – are labor. Accordingly, they are governed
by two different contracts: labour contract between the executor and the customer-compa-
ny, civil contract between the outsourcer-company and customer-company. The relationship
between customer-company and outsourcer-company formed on the basis of the contract
of civil agreement, the subject of which is to provide services to the customer and which,
of necessity reflect specific tripartite relationship, should contain elements regulating labor.
Thus, according to practitioners, the contract shall include the following essential elements of
labour and law character as job content and job duties, term and grounds of employee involve-
ment, work conditions, prohibition of unjustified refusal of the customer to use the labor of
the employee (or the provision of the requirement to replace employees must be substantiated
by customer). Thus, almost all the material terms of the employment contract specified in Art.
24 of the Labor Code of Ukraine are listed. It should also be noted that the employee actually
will perform work duties in other enterprise. The main legal complication is a decision on the
division of responsibilities between both independent entities of relations: the legal customer
of the employee and the actual user of his work (Skakun, 2008). It is important in the labour
contract to determine the rights and obligations of the employer, because the employer side
118
serve two entities – the formal employer who is a party of the labour contract and the actual
employer who is not draw labour relationship with a worker. It is difficult to predict some
conditions in the labour contract, for example, work place, date of commencement of work,
in many cases it will be need concluding additional agreements. If the employee is hired for a
particular company, the lobour contract is terminal contract, the term must be determined
depending on the period which the contract is concluded with a customer for.
The current legislation provides that external entities that provide accounting, can
not be brought to criminal, disciplinary, administrative liability. They can only bear civil
liability in accordance with applicable law and terms of the contract. However, the parties
which have concluded an agreement on the provision of accounting in the allocation of
responsibility, should comply with the provisions of the Civil Code of Ukraine.
The maximum term of outsourcing contracts in Ukraine usually is one year. Although
in some foreign countries there is a tendency to conclude long-term contracts, as “long-
-term relationship leads to the creation of effective mechanisms for the allocation of risks
in terms of lack of information. A properly worded contract must accurately and clearly
define the type and nature of the customer-company.
ANCOR Holding in Ukraine conducted a study “The Evolution of Outsourcing. Demand
analysis and quality assessment of services”. The study was conducted among managers at va-
rious levels of Ukrainian and foreign companies operating in Ukraine. The study analyzed
the need for companies in the IT-outsourcing, resources for production processes, marketing,
accounting, payroll, logistics, development and systematization of information, outsourcing of
medical representatives, recruitment outsourcing, accounting personnel and personnel admi-
nistration and administrative outsourcing. Among respondents 42% of people carry out com-
mon management, 36.7% work in management personnel, 18.5% perform administrative func-
tions. 34.7% of respondents work at companies with the total number of employees in Ukraine
from 100 to 500 people, 21.4% – with a population of more than 1,000 employees, 19.4% – with
up to 50 employees, 14.3% – with the number of 50 to 100 employees, 9.2% – with a population
of 500 to 1,000 employees and 1% – with a population of over 10 000 employees (Fig. 2).
Fig. 2. Portrait of the respondent. The total number of companies personnel in Ukraine
119
Usually business processes are passed for outsourcing. 36% of respondents identified
that their employers pass to outsource business processes, among them IT – services oc-
cupied 40.5%, logistics – 35.1%, resources for production processes – 27%, marketing servi-
ces – 21.6%, recruitment – 18.9%, accounting – 13.5%, payroll – 13.5%, processing and syste-
matization of information – 8.1% (Fig. 3) (Analysis of the demand…).
In addition, 31% of respondents indicated that their companies use involved staff pro-
vided by private employment agencies, of which 48.4% use the service of temporary staff
on short-term projects (Temporary Staffing), 35.5% providing staff on long-term projects
(Staff Leasing), 29% – registration of personnel provider in the staff (Outstaffing), and
12.9% of respondents indicated that use outsourcing for various projects.
Fig. 3. Rating of outsourcing business processes

Benefits of application of outsourcing services. The survey showed that 41.2% of respon-
dents believe the main advantage of outsourcing services is save their own resources, 37.6% of
respondents said about optimization and acceleration of business processes, 32.9% believe that
their business has become more efficient, 14.1% noted the improvement of the quality and con-
trol of business processes, 14.3% believe that, due to outsourcing companies, they are able to use
solutions based on the latest achievements of the industry (Fig. 4) (Analysis of the demand…).
Fig. 4. Rating of benefits of outsourcing business processes for companies

120
Thus, the main prerequisite for successful implementation of enterprises activity pro-
viding services in accounting on a contractual basis, is paying special attention to deter-
mining the cost of services.
Transfer of accounting organization to specialized organization is fixed in the order of
accounting policy for the relevant financial year. The formation of accounting policy may
be entrusted to specialized organization.
In accounting costs for the services of accounting and taxation by specialized organi-
zation can be considered as administrative costs. The administrative costs associated with
managing and servicing of enterprise recorded on an active account 92 “Administrative
costs”. Analytical accounting is managing with the expenditures.
In order to enhance the implementation of accounting outsourcing is necessary to im-
prove the legislative framework that would protect the interests of domestic businesses; carry
out explanatory work among employees regarding the benefits of outsourcing; conduct sys-
tematic monitoring of the market of outsourcing services. In this paper, the theoretical gene-
ralization process of accounting outsourcing has been investigated. Key findings are follows:
⁃⁃ Application of external services for accounting in the enterprise gives rise to a number of
features of accounting, which necessitates their scientific substantiation.
⁃⁃ Using accounting outsourcing is needed selection of external business accounting, which
must meet the requirements for organization and accounting, which are made by customer.
⁃⁃ The main thing of using outsourcing is a clear analysis and control of all solvable by en-
terprises problems, comparing them with the strategic goals to rationally determine the
amount of work that may be assigned to outsourcer-company.
Therefore, outsourcing is currently the most effective business tool, because it allows
companies gain a competitive advantage.
References:
Pisarchuk, O. & Strukova, I. (2010). Place of outsourcing and consulting companies in organization
of accounting. Scientific works of the Kirovohrad National Technical University. Economic sciences, 17. 262–266.
Aman, A. & Zaidah, E. (2011). Managing Relational Risks in Accounting Outsourcing: Experi-
ences of Small Firm. World Applied Sciences Journal, 15 (1), 56–62.
Krell, E. (2007). Outsourcing the finance and accounting functions. Management Accounting Guide-
line. CIMA, AICPA and CMA Canada.
Outsourcing an accountant: to be or not to be? (2013). Consulting in Ukraine. Retrieved from
http://acf.ua/konsalting
Struk, N. (2008). Historical aspects of accounting development in different countries of the
world. Formation of a market economy in Ukraine, 8, 407–413.
Didukh, O. (2013). Determination of the main advantages and disadvantages of using outsourc-
ing in the economic activity of enterprises. Innovative economy, 3, 128–132.
Sinitsa, T. (2014). Accounting outsourcing as an innovative tool for optimizing the activity
of enterprises. Collection of scientific works of the Kharkiv National Pedagogical University named after
G.S. Skovoroda, 14, 171–177.
Kutuzov, M. & Kotsiuba, Y.( 2015). Accounting outsourcing in Ukraine: use, problems and pros-
pects. Economic Journal of the East European National University named after Lesia Ukrainka, 1, 83–87.
121
Kafka, S. (2013, May 27–28). Theoretical foundations of outsourcing. Financial Transformation:

Expert Opinions on Joint Services and Outsourcing, 34.
Skakun, L. (2008). Accounting on contractual terms: the essence and prerequisites of manage-
ment. Problems of the theory and methodology of accounting, control and analysis, 3(12). 407–418.
Analysis of the demand and evaluation of the quality of outsourcing services in Ukraine. Re-
trieved from http://job.ukr.net/articles/analiz-vostrebovannosti-i-ocenka-kachestva-uslug-aut-
sorsinga-v-ukraine
122
Chapter 9.
USING THE TOOLS OF AUDIT
AND DIAGNOSTICS IN MARKETING
POLICY OF COMPANIES IN UKRAINE
Natalya Andryeyeva, Daria Zinkovska, Roshazlizawati Mohd Nor
1. The theoretical aspects of marketing audit
M odern Ukraine’s economy is characterized by high level of dynamics and varia-

bility of the environment. This leads to fact that companies, which want to keep
the favorable competitive position, need to conduct flexible marketing policies that will
adapt to the constant changes in the environment of the firm. To achieve this aim, it is
important to choose the most effective marketing tools that will study in detail the micro-
and macro environment of enterprise, detect weaknesses in its activities and strengths re-
lative to competitors and on the basis of this information to create a plan of optimization
and development of marketing policy. One of these tools can be a marketing audit.
First of all, it is needed to understand the essence of the marketing audit and its diffe-
rence between other kinds of audits for its effective usage as a tool for improving the firm
functioning effectiveness of. According to Article 3 of the Law of Ukraine “About audit
activity”, “audit – is a review of accounting and financial reporting indicators entity for
the purpose of expressing an independent opinion of the auditor about its authenticity in
all material respects and compliance with the laws of Ukraine, Regulations (Standards)
of accounting or other rules (internal regulations of entities) in accordance with require-
ments of users (Law of Ukraine “About audit activity”).
The term “marketing audit” is wider. A large number of foreign and domestic authors
attempted to give a definition of this term (Table 1).
On the basis of research of definitions of “marketing audit” there are two approaches
among authors, namely:
⁃⁃ definition of marketing audit in the narrow sense, as study of the company only for mar-
keting functions;
⁃⁃ definition of marketing audit in the broad sense as research of the marketing environment
and company activity in this environment.
It should be noted that the a disadvantage of these two approaches is the lack of a holistic
view on marketing audit and insufficient attention to the procedures and results its conduc-
ting, because the definition of place on the market, identify its strengths and weaknesses, deve-
lop a new strategy for the company are the main differences from traditional accounting audit.
Considering the main features of international scientific approaches to audit, current

trends such as the globalization of the economy and integration processes that characte-
rized the modern economy of Ukraine, we propose the following definition of marketing
audit, namely: marketing audit – systematic process of comprehensive analysis and objecti-
ve assessment of the company based on the aggregate financial, social, environmental and
market indicators, which provides the definition of firms in the market place, identifying
marketing opportunities and weaknesses of the company, formation of the most effective
marketing strategies to fully customer satisfaction, maximize profits and satisfaction of
social needs (Andryeyeva, Zinkovska, 2015).
Table 1. The approaches of different authors to the definition of «Marketing audit»

Author Definition
G.L. Bahiyev it is identifying of weaknesses in concepts, strategies and marketing plans, in the result
(2001) of its implementation
M.I. Byelyavtsev it is focused administrative consultation for identifying of lost profits from insufficient
(2006) use of the marketing mix and develop appropriate marketing strategies of the firm
it is analysis of the current aims of the company, its strategy, organization, productivity
J. Blythe (2000) of work and areas of activity; the main aim of marketing audit is identifying the
strengths and weaknesses of the company that managers could improve in the future
it is a comprehensive, systematic, independent and periodic inspection of marketing
E.P. Golubkov
environment, objectives, strategies and specific marketing activities for the organization
(2006)
in general or to specific business units
it is complete, systematic, independent and repeated at regular intervals study of the
marketing environment, objectives, strategies and activities of the company or its
Ph. Kоtler
business units. The destination of marketing audit is identifying problem moments in
(2003)
the company and also research of the opportunities and proposing a plan of actions for
improving the activity and productivity of the company
it is comprehensive analysis of all marketing operations in organization, which means a
A. Loya (2011) systematic evaluation of plans, objectives, strategies, activities, organizational structure,
and assessing the effectiveness of the staff engaged in marketing
it is systematic, critical and objective review and assessment of the environment and
M. McDonald
company’s activity. Marketing audit is a part of a larger revision of the guidelines
(2000)
associated with marketing environment and marketing operations
B.A. Soloviev it is analytical tool of identifying and using of marketing resources of the company to
(2010) improve its position on the market
A. Wilson it is analytical tool for identification, evaluation, measurement, motivation and
(2003) implementation of actions to achieve the best results
it is comprehensive independent evaluation of the external and internal environment of
V.D. Shkardun
the company and the development of recommendations for bringing state and propose
(2003)
of the firm in line with the requirements of the environment
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Chapter 9. USING THE TOOLS OF AUDIT AND DIAGNOSTICS IN MARKETING POLICY OF COMPANIES IN UKRAINE
On the base of this definition modern principles of marketing audit can be identified.
We propose to divide them into general (those that are characteristic of any type of audit) and
specific (those that are unique to the marketing audit). The general principles are the following:
1. Systematic. This principle provides that the marketing audit should be not one time, but has
recurring character and carried out at regular intervals. This is due to highly dynamic markets.
2. Complexity. This principle provides that during the marketing audit should evaluate individual indi-
cators and position of the company in general, its position in the market against major competitors.
3. Objectivity. This principle means that marketing audit should carry out not only employees,
but also external auditors. It is necessary to eliminate the factor of interest (both material and
moral) of the employees.
4. Rationality. This principle provides that the marketing audit should be carried out in a certa-
in logical sequence that will ensure the reliability and accuracy of the results, and will make
useful conclusions.
5. Effectiveness. This principle means that marketing audit should be conducted to improve the
efficiency of functioning company.
Specific principles include:
1. The principle of environmental orientation implies that the study of the company should be deter-
mined taking into account the implementation of environmental norms and standards of Eu-
ropean countries and the desire to maximize production of environmentally friendly products.
2. The principle of social orientation implies that analysis of the enterprise should be formed with
a priority of social-ethical marketing what means in the interests of society.
3. The principle of market orientation implies that the research should be based not only on inter-
nal information about the company, and on the research of its place in the market in relation
to the competitors.
4. The principle of using institutional approach defines that in addition to the internal environ-
ment of the company analyzed the institutional unit with which it interacts (state supplier
firms, banking institutions, etc.).
5. The principle of using the digital determines that research should be conducted with maximum
use of modern Internet platforms and other marketing information technology.
On the base of analyzes of information about the nature of marketing audit, its types
and methods it is possible to determine its main tasks:
⁃⁃ determine accordance of mission and goals of the firm to requirements of society and its
correction if it is necessary;
⁃⁃ determine accordance of the customer needs to products, which firm is producing, level of
satisfaction of the goods and possible ways to improve it;
⁃⁃ analysis of micro and macro environment of enterprise for identifying positive and negative
impact factors;
⁃⁃ create of measures for minimizing the impact of negative environmental factors of the firm
and losses of it, and a set of actions with maximizing of use of favorable factors for additio-
nal income;
⁃⁃ analysis of the competitive environment and place of the company on the market to deter-
mine competitive advantage and ways of its amplification;
125
⁃⁃ diagnosing of problems in the organizational structure and identifying ways to optimize it;
⁃⁃ analysis of the effectiveness of product, price, promotion and communication policy of the com-
pany and its competitiveness against major competitors and the create of optimization measures.
In addition to identifying key tasks of the marketing audit is important to determine
its objects and subjects.
We propose to determine the objects of marketing audit as the components of the
marketing of the company in its dynamics and development, which are located in the
internal environment of the company and in the external environment of the company.
Objects of marketing audit can be divided into two groups – internal and external
(Shkardun, 2003) (Fig. 1).
Fig. 1. Objects of marketing audit

The internal objects of the marketing audit include components that are directly connec-
ted with the company’s activity and which might be affected. This includes strategy and aims,
marketing policy (product, sales, pricing and communication), organizational structure,
technical level of production, financial statements, staff and infrastructure of the company.
The study of internal objects of the marketing audit provides facilities to identify
weaknesses of the processes of production and sales, marketing activities, weaknesses in
the administration of human and financial resources and infrastructure of the company.
External objects of the marketing audit include components of marketing activity of
the company that are out of the company environment that can’t be impacted or requires
additional effort by the company. This includes macro factors (political, economic, de-
mographic, environmental, natural and cultural), competitors, customers, partners (sup-
pliers, financial institutions, media, etc.)
The research of external objects of the marketing audit allows to identify threats and
opportunities, and also to create measures for harmonizing of the company’s activity with
the environment, to use favorable conditions to gain extra revenue and reduce the impact
of negative factors.
126
The selection of object of the marketing audit depends on its goals. Depending on the
aim the company seeks to achieve and the resources that it has, can be selected as a single
object of study and all listed above.
The subjects of marketing audit are executors of this type of inspection at enterprise.
They can be divided into 3 categories – internal, external and joint marketing audit (Sh-
kardun, 2003) (Fig. 2).
Internal subjects
External subjects
Administration of the
Private firm for
company
conducting of the
marketing audit
Audit department
Marketing department Joint marketing

audit
Private consultant for

Specially created group
conducting of the
marketing audit
Marketing specialist
Fig. 2. Subjects of marketing audit

Internal marketing audit subjects are administration of the company, the audit de-
partment (if it exists), the marketing department, specially created group or marketing
specialist. It is used mainly to save financial resources what is necessary for attraction of
external auditor.
External marketing audit subjects are private companies or independent consultants
for conducting a marketing audit. It is used to get the most objective information about
the company and possible ways of its development.
The joint audit involves collaboration of structural departments of the company with
the external auditor. It is used for deeper and complete analysis of marketing activities of
the company.
In the process of choosing marketing audit subject must consider certain criteria, namely:
⁃⁃ availability for financial resources for conducting of the marketing audit;
⁃⁃ availability of human resources which could be involved in conducting of the marketing
audit;
⁃⁃ professionalism and experience of employees of the firm in this kind of activity ;
⁃⁃ size of the enterprises.
127
After determination of all conceptual categories, in our opinion, it is appropriate to

consider the algorithm of marketing audit. We offer to divide the process of marketing
audit in the following stages:
Stage 1: setting goals and tasks of the marketing audit, formation of its plan. This stage inc-
ludes the following:
⁃⁃ determination of the general state of the enterprise’s marketing activities and its effectiveness;
⁃⁃ analysis of individual components of the company’s activity, for example communication
policy or optimal organizational structure;
⁃⁃ develop a plan for entering the new market and feasibility of such actions;
⁃⁃ definition of consumer’s attitudes to the company and the development of measures to
improve it, etc.
This stage is important because it will affect on the scale of marketing audit, its types,
forms and methods, executors.
Stage 2: diagnostics of marketing policy. This is the most massive step that determines the
success of marketing audit in general. It has several components, namely:
1. Marketing diagnostics of the enterprise, including:
⁃⁃ diagnostics of the marketing state of the company (analysis of internal financial and mar-
keting indicators, indicators of production and employee’s satisfaction);
⁃⁃ diagnostics of the state of the market and the competitive position of the company on it;
⁃⁃ diagnostics marketing potential and reserves of the company;
2. Formation of the plan of actions. On the base of analysis the information obtained in the pre-
vious stage, plan of the actions is develop in 2 ways:
⁃⁃ identified problems and weaknesses of the firm need to eliminate and minimize their nega-
tive impact on the profitability of the company;
⁃⁃ identified competitive advantages and positive factors of the environment is necessary to
make the fullest use to increase profits.
3. Evaluation of alternatives means the choice of the most effective option from the list of propo-
sed measures for the improvement of marketing activities and strategy firm.
Stage 3: control over the efficiency of the proposed measures and correction of strategy
and elements of marketing policy, according to the dynamic environmental conditions of
enterprise.
Thus the process of marketing audit can be summarized and represent (Fig. 3). As seen in
the Fig., the process of marketing audit is a cyclical and permanent. The initial stage is set-
ting goals and making decisions on planning procedural component, the next step is the dia-
gnostics of marketing policy, on the basis of the diagnostics of marketing policy is developed
the list of the most effective measures for improving marketing activity of the enterprise.
It is important to note that the diagnostics of the marketing policy of the company
takes the biggest part of marketing audit concept; therefore it is appropriate to consider
it separately.
128
Fig. 3. The process of marketing audit

2. Diagnostics of marketing policy of the company

The first of all it is needed to identify the essence of the term “diagnostics” and consi-
der its nature, types and destination more in detail.
The definition “diagnostics” by foreign and domestic scientists has been explored
The narrow approach to diagnostics is the mostly common in the economic literatu-
re. For example, Muravjov A.I. interprets diagnostics as a way to establish the nature of
failures the normal course of the economic process on the basis of typical features that are
unique to this object (Muravev, 1998). Author focuses attention only on the analysis and
control of deviations from the normal course of business activity. In addition, the term
“normal course of the commercial process” can be interpreted ambiguously, which does
not make final conclusions about the state of the research object.
Some authors identify diagnostics with the analysis (economic or financial), without
singling out specific functions and tasks the actual diagnostics as a separate stage of manage-
ment. Quite interesting about the destination diagnostics is thought Hetman O.O. and Sha-
poval V.M.: “Diagnostics as a way of of recognition of the social and economic system through
implementation of complex research procedures and identification of weak links in them
and” narrow places “refers to methods of indirect research” (Hetman, & Shapoval, 2007).
Rapoport V.S. determines the diagnostics as administrative work to identify problems
and narrow places in enterprise’s management system (Rapoport, 1988). The disadvantage
is that the authors have not paid attention to the fact that diagnostics can detect problems
not only in the management of the enterprise, but also in any other system.
According to Mishchenko A.P.: diagnostics is a stage of decision-making process in
which managers analyze key causal relationships concrete situation (Mishchenko, 2004). It
should be noted that the author ignores the fact that the diagnostics involves system analysis.
Kolos B. determines that the diagnostics is a search, analysis, identification of pos-
sible mistakes and develop ways to improve the management system (Kolos, 2004). The
disadvantage of this definition is that diagnostics can detect not only possible errors but
also existing ones.
By definition of Korotkov E.M. diagnostics is determination of the state of the object,
phenomenon or process of management through implementation of complex research
129
procedures, identify weak links in them and “narrow places” (Korotkov, 2000). It should
be noted that besides the said, diagnostics also includes the development of measures to
eliminate weak links and narrow places.
Verba V.A. and Reshetnyak T.I. expand the boundaries of diagnostics and focus on
the connection of business problems. The authors consider the diagnostics as “the process
of detailed and deep analysis of the problem, identify the factors influencing it, prepare
all the necessary information to make decisions and identify key aspects of interrelation
between problems, general aims and results of the company (Verba, & Reshetniak, 2000).
In the works of Lafta J.K. diagnostics is defined as the analysis of the quantities and
ratios parameters (indexes) of organization, market and institutional environment, and
changes in data ratios to determine the causes of the problem, hierarchical level of the sys-
tem (level of functions, structure or parameters)on which problem was appeared and can
be eliminated (Lafta, 2004). The disadvantage is that the diagnostics should be considered
as a research process.
It could be noticed that modern diagnostics appears in five aspects:
1. management – as a system of knowledge that is based on specific information directed to fur-
ther use in the processes of development and decision making;
2. dynamic – in the form of research of the dynamics and determination of trends to possible
changes in conditions of functioning and the state of the object;
3. functional – as a management function that provides feedback to the subject of management
through the implementation of diagnostic procedures;
4. analytical – as analytical base that serves as ground for assessing the state of research object;
5. search – as the main tool to identify mismatches in the work of company, identifying existing
and possible errors in operation.
We offer the following definition of diagnostics of marketing policies of the company
on the basis of studied interpretations of this term, with consideration to selected defi-
ciencies and with including of marketing component.
Diagnostics of marketing policy of the company is a comprehensive and systematic study
of internal and external marketing environment of enterprise, accordance of marketing
policy to needs of the market and consumer, analysis of competitors and find out measures
to maximize the use of favorable factors and minimize the impact of adverse environmen-
tal conditions to provide a high level of the competitiveness, profitable and sustainable
competitive position, constantly large profit, social and environmental needs of society.
Diagnostics of marketing policy can be divided into 3 levels: strategic, tactical and
operational (Table 2).
Each level of diagnostics enables to obtain necessary information for making decision
about marketing policy in accordance to environmental conditions and market needs. The
information that get at each level of diagnostics enables to develop a plan of measures for
optimization of the enterprise’s activity, even in crisis period.
130
Table 2. Levels of diagnostics of marketing policy of the company

Level of
The direction of research
diagnostics
It is responsible for receiving the information what is necessary for the development of a
Strategic strategy. Comparative studies of strategic economic situation of the enterprise‘s portfolio,
diagnostics evaluating the competitiveness of enterprises, identifying opportunities and threats of the
company should be referred.
Forms the information for the development of programs and plans. The special value becomes
Tactical
the comparison economic interests of participants of marketing activities on ground of which
diagnostics
can be developed procedures for their approval.
Operational Determination of the limits of variation of enterprise‘s activity from the intended target
diagnostics parameters.
We considered how diagnostics of marketing policy can be used for crisis manage-
ment (Table 3).
Table 3. The use of diagnostic results of marketing policy of the company in crisis
management
The information that will be
Level Use of the received information in the crisis management
obtained
- Definition of profitable and promising areas of business
elaboration programs in their development
- Characteristics of the
- Identifying the less profitable or even unprofitable
enterprise business portfolio
products, expediency of their elimination;
- The level of the
Strategic - Definition of competitive advantages and its development;
competitiveness
- Development of programs for maximum realization of
- Threats and opportunities of
market opportunities for the company
the enterprise
- Development of measures to minimize the impact of
negative factors, etc.
Characteristics of interactions - Constant monitoring of existing and potential suppliers,
Tactical with suppliers, intermediaries, intermediaries to cooperate on the most favorable terms;
customers, contact audience - Support feedback from customers, etc.
- Correcting plan, if the differences are caused by inflated
forecast data
Opera- The divergence of planned and
- Identification of weaknesses of the enterprise‘s activity
tional actual indicators
and the development of measures to increase of indicators of
the defined positions etc.
Table 3 shows that the diagnostics of marketing policy can be used for keeping compe-
titive position and out of the crisis situation because allows to:
⁃⁃ analyze the market position and place of company’s goods on it, to move resources for
supporting the most popular and profitable products;
⁃⁃ to study the activities of competitors and identify the strengths and weaknesses of the com-
pany compared to them;
⁃⁃ to analyze the environment and develop a program of measures to counteract negative fac-
tors and implementing favorable;
131
⁃⁃ to study production process and identify its compliance with the requirements of customers
and society (the environmental security, social support, technical support, etc.);
⁃⁃ to analyze economic relations and identify ineffective, replace them with most profitable;
⁃⁃ to control efficiency of the developed programs and correct it according to changes in the
environment;
⁃⁃ to control accuracy of forecast data, etc.
These data can provide timely and adequate response on changes in the environment
of the enterprise in the crisis which can help its survival in this period and even get profit
from its activity.
Also, it is useful to consider the process of diagnostics. It includes several components
that are consecutively executed in the process of marketing audit (Fig. 4).
Fig. 4. The process of diagnostics

Each of the components considered in the Table 4 in details.

Thus, we can say that marketing diagnostics, which can be seen as part of a marketing au-
dit, as well as a separate tool, is effective for the study and improvement company’s activity.
Table 4. The essence of each component of marketing diagnostics

Component
Essence
of diagnostics
 diagnostics of marketing state of the company (analyses of internal financial and
marketing indicators of production and employee satisfaction);
Marketing
 diagnostics of market conditions and the competitive position of the company on
diagnostics of
the market;
the enterprise
 diagnostics of marketing potential and reserves of the company;
 forecast calculation of basic economic indicators of the company
 measures for minimize the negative impact identified earlier factors;
Formation of  measures to maximize the use of the identified positive trends, opportunities and
the plan of competitive advantages;
actions  measures to adapt goals and strategies to external conditions of the marketing
environment;
 calculation of all possible implementation of the proposed measures;
Evaluation of
 calculation of the most effective measures;
alternatives
 forecast efficiency of the proposed measures.
132
In summary, it can be concluded that the diagnostics of marketing audit allows to

analyze the environment functioning of the company (both external and internal), exa-
mine competitors and determine the competitiveness of enterprises, to identify the favo-
rable and unfavorable factors that affect to the operation of producers, and on the base
of the received information to develop a plan of measures to optimize operations and
increase profitability.
References:
Law of Ukraine “About audit activity”. Retried from: http://zakon4.rada.gov.ua/laws/
show/3125-12
Bahyev, H.L., Ann, Kh., Tarasevych, V.M. (2001). Marketing. Moscow, Russia: Publishing House
«Economics».
Belyavtsev, M.I., Vorobyov, V.M., Kuznetsov, V.H. (2006). Marketing Management. Kyiv, Ukraine:
Donetsk National University.
Blayt, Dzh. (2000). The Basics of Marketing. Retried from: http://westudents.com.ua/glavy/38868-
marketingovyiy-audit.html
Holubkov E.P.(2006). Fundamentals of marketing. Moscow, Russia: Finpress.
Kotler F. (2003). Marketing Management. St. Petersburg, Russia: Peter.
Loya, A. (2011). Marketing audit – an important tool to determine strengths and weaknesses of
the companies. International Journal of Multidisciplinary Management Studies, 1(2), 92–108.
McDonald, M. (2000). Strategic Marketing Planning. St. Petersburg, Russia: Peter.
Solovev, V.A., Drynochkyn, A.V. (2010). Marketing process management. Moscow, Russia: East – West.
Uylson O. (2003). Audit of marketing. Dnepropetrovsk, Ukraine: Balance Club.
Shkardun, V.D. (2003). Implementers of marketing audit. Marketing and marketing research, 2, 50–59.
Andryeyeva, N.M., Zinkovska, D.V. (2015). The role of marketing in the system of audit activity
of the enterprise: a modern view on the problems. Journal of Social and Economic Research, 56, 11–18.
Shkardun V.D. (2003). Objects of marketing audit. Marketing and marketing research, 1, 13–22.
Muravev, A.I. (1998). Theory of economic analysis: problems and solutions. Moscow, Russia: Finance
and Statistics.
Hetman, O.O., Shapoval, V.M. (2007). Economic diagnostics. Kyiv, Ukraine: Center for Educa-
tional Literature.
Rapoport, V.Sh. (1988). Diagnostics of management: practical experience and recommendations.
Moscow, Russia: Economics.
Mishchenko, A.P. (2004). Strategic management. Kyiv, Ukraine: Center for Educational Literature.
Kolos, B. (2004). Management of the State in the III Millennium, or Strategy and tactics of building
the Ukrainian national state. Lviv, Ukraine: Initiative.
Korotkov, E.M. (2000). Anti-crisis management. Moscow, Russia: INFRA.
Verba, V.A., Reshetniak, T.I. (2000). Organization of consulting activities. Kyiv, Ukraine: Kyiv
National Economic University.
Lafta, Dzh.K. (2004). Management solutions. Moscow, Russia: the company «Blagovest – V».
133
Chapter 10.
MARKETING OF TOURIST FLOW AS
AN INSTRUMENT OF DEVELOPMENT
OF TOURISM IN THE REGION
Sergey Nezdoyminov, Olga Shykina, Nor Zafir Md Salleh
Introduction
T he modern tendencies of regional social and economic development are in need

of upgrading the instruments of region development regulation. The most im-
portant are those instruments that can provide regions with incentives for discovering
their own resources, motivate them to activate inner development reserves. The reliable
source of investment resources should be the development of tourism, moreover each re-
gion of Ukraine contains sufficient amount of inviting tourist attractions which, under
conditions of relevant advertising and support, could become a considerable source of
local budget profit. In accordance with the data provided by the World Economic Forum,
Ukraine is using less than a third part of the available tourism and recreation potential.
Due to the expert estimations, the revenues of budgets of all levels could amount to $10
billion per year under full-fledged realization of Ukrainian tourism potential, the same
amount as countries with commensurate with Ukrainian tourism and recreation potential
receive (Oliynyk, D.I. et al., 2015, p. 27).
Ukraine’s integration with the international community, realization of regional de-
velopment strategies, introduction of market methods management of both economies
taken as a whole and certain recreation and tourism enterprises and should be based on
marketing researches of tourism flows dynamics and demand for the regional tourism
product which is produced and released in the regions of Ukraine.
1. Structure of tourist flow by kinds of tourism

Regional problems of development of the tourist flow, analysis of the factors affecting
its dynamics attracted the attention of modern researchers: Parte-Esteban L. and Alberca-
-Oliver P. (2016, p. 15), Bajs I.P. (2015, p. 122), Nenciu D.S., Constandache M., Stanciu A.C.,
and Condrea E. (2015, p. 809). One of the tourism development indicators in the separately
considered region could be the volume of tourism flow that reflects the actual number of
tourists being present on the given territory. As far as is known, country’s position on the in-
ternational tourism market is defined by the net tourism balance – difference between rates
of inbound and outbound tourism. Analyzing structure of country’s tourism flow the conc-
lusion about the potential of separate tourism directions development may be drawn. In
2014 distribution among separate tourism types in Ukraine was as follows: general amount
of served tourists – 2216957 people (100.00%), inbound tourism 16618 people (0.75%); outbo-
und tourism – 1925344 people (86.85%); domestic tourism – 274995 people (12.40%) (Table 1).
Table 1. Tourist’s distribution by the tourism types in 2012–2014 (people)
Change, From total number:

The total number of
Region Years 2012 – 2014, Inbound Outbound Domestic
tourists
% tourism tourism tourism
2012 2680507 262465 1774737 643305
Ukraine 2013 – 17.29% 3067747 221272 2270001 576474
2014 2216957 16618 1925344 274995
2012 9.80% 66.20% 24.00%
The structure
2013 – 100.00% 7.21% 74.00% 18.79%
of tourist flow
2014 0.75% 86.85% 12.40%
2012 51808 9509 30628 11671
Odessa
2013 – 37.32% 46845 6959 33910 5976
region
2014 32475 2954 24987 4534
2012 18.35% 59.12% 22.53%
The structure
2013 – 100.00% 14.85% 72.39% 12.76
of tourist flow
2014 9.10% 76.94% 13.96%
Source: compiled by the authors on the basis of State Statistics Service of Ukraine, 2015.
According to official data of statistics, scientists’ research on the state of organized

tourism, Ukraine is country with the higher number of citizens who travel abroad than
number of foreigners visiting its own territory. Prior to political crisis, the share of inbo-
und tourism in the total amount equaled to 7.21% in 2013 and 9.80% in 2012. The share of
domestic tourism is decreasing in both relative and absolute terms in 2012 it was 24.00%
while in 2014 – 12.40% (State Statistics Service of Ukraine, 2015).
The general amount of tourists in Odessa region also decreased by 37.32% that corre-
sponds to the 13th place (Fig. 1). Positive value of the given indicator can be traced only in
Kyiv, the biggest decrease in percentage in Luhansk, Donetsk, Chernihiv and Kirovograd
regions. Distribution by type of tourism in Odessa region is slightly different from the
general in the country. The region inbound tourism occupies a larger share in 2014 than in
Ukraine as a whole – 9.10%, although the trend over the past 3 years tends towards decline.
The biggest share falls on outbound tourism – 76.94%, domestic tourism takes the second
place with the index of 13.96%.
Over the past three years Odessa region has risen from 8th (2012–2013) to the 5th pla-
ce (2014) by the total number of served tourists. Judging by the numbers, in 2014 tourism
flow constituted 32.5 thousand people that is 30.7% (or 14.4 thousand people) less than in
2013. In terms of inbound tourism Odessa region occupies the 2nd place in 2014, with only
136
Chapter 10. MARKETING OF TOURIST FLOW AS AN INSTRUMENT OF DEVELOPMENT OF TOURISM IN THE REGION
Kyiv preceding, the reason of such change (in 2012–2013 – 5th place) is exclusion of Auto-
nomous Republic of Crimea and city of Sevastopol from the rating and dramatic decline
of inbound organized tourism in Lviv region. We can state that the closest competitors
for inbound tourism are Kyiv city, Lviv and Ivano-Frankivsk region (Shykina & Liptuga,
2015, p. 540). According to the research, outbound tourism in Odessa region ranks first
in the distribution by the types of organized tourism, for the last three years in the out-
bound tourism rating of Ukraine Odessa region has risen from the 5th (2012–2013) to the
4th place in 2014, but the total amount of served outbound tourists decreased in 2014 in
comparison with 2013 by 57.6% or by 4.0 thousand people. Number of served domestic
tourists in Odessa region in the last three years was constantly falling and in 2014 consti-
tuted 4.5 thousand people that is 24.1% (or 1.4 thousand people) less than in 2013 (Table 2).
Nevertheless in the rating of Ukrainian administrative units Odessa region moved from
11th position in 2013 to the 7th position in 2014 that confirms the general decline of the do-
mestic tourism in the country. At the same time services of Odessa region tour operators
and travel agents were used by the 3.0 thousand foreign tourists from 28 world countries.
The highest number of foreign tourists arrived from Belarus – 1.5 thousand.
Fig. 1. Change in the total tourist amount in the regions of Ukraine for 2012–2014
Source: Shykina & Liptuga, 2015, p. 540.
What should be noted is a rapid decline in demand for tours in Odessa region from
countries such as Russian Federation (decrease from 76.48% in 2013 to 8.06% in 2014), the
USA (190 tourists arrived in 2013 while in 2014 only 27 tourists used the services of tour
operators and travel agents), Great Britain (185 tourists in 2013 compared to 9 tourists in
2014). There are a growing number of tourists from the following countries: Poland (in
2013 no one came, and in 2014 – 445 tourists), Georgia (2013 – 7 tourists, in 2014 – 336),
Lithuania (in 2013 – no tourists, in 2014 – 138). Regional studies of the tourism market
show that in 2014 249 subjects (172 legal entities and 77 natural persons-entrepreneurs)
performed tourist activities in Odessa region, services of which were used by 43.4 tho-
usand of tourists and sightseers, while in 2013 there were 302 subjects of tourism, which
provided services to 61.6 thousand of tourists and sightseers.
137
Table 2. Distribution of foreign citizens by the countries from which they arrived to Odessa
region
2012 2013 2014
Rank
Country people % Country people % Country people %
1 RF1 5435 57,16 RF 5322 76,48 Belarus 1535 51,96
2 Germany 1164 12,24 USA 190 2,73 Poland 445 15,06
3 USA 448 4,71 Great Britain 185 2,66 Georgia 336 11,37
4 Austria 252 2,65 Belarus 164 2,36 RF 238 8,06
5 Great Britain 245 2,58 Australia 154 2,21 Lithuania 138 4,67
6 Turkey 235 2,47 Austria 147 2,11 Israel 62 2,10
7 Italy 232 2,44 Netherlands 119 1,71 Italy 38 1,29
8 Australia 200 2,10 Italy 97 1,39 Turkey 36 1,22
9 Netherlands 146 1,54 Japan 75 1,08 Belgium 31 1,05
10 Hungary 120 1,26 Germany 65 0,93 France 28 0,95
1
Russian Federation
Source: compiled by the authors on the basis of State Statistics Service of Ukraine, 2015; Shykina & Liptuga, 2015.
2. Prospects for the development of cruise tourist flow in the black sea
region of Ukraine
Researches of the market of marine passenger transportations has shown that not high ef-
ficiency of marine cruise tourism functioning in Black Sea regions of Ukraine is to the greatest
extent defined by not taking into consideration its vital part which is modernization of the
port and tourism infrastructure, construction of cruise fleet. Thus the amount of investments
in the water transport sector in 2014 is only 0.2 billion UAH or 1% of the total industrial invest-
ment (Statistics on investment projects, n.d.). Reduction of the sea passenger transportation
in Ukraine has been caused by their unprofitability and a decrease in the number of passenger
ships which are suitable for use. High payment rates on loans, burdensome taxes, higher than
those imposed on ship owners in other countries, have led to the loss of marine cruise fleet, its
physical and moral deterioration. Under such circumstances state appeared unable to prepare
and implement reformation of the sector timely, take effective measures aimed at creating
legal framework on water transport which would ensure implementation of the necessary
support tools and its withdrawal from the systemic crisis, drawing on the experience of other
countries. Analysis of the problems of the cruise market development shows that for success-
ful functioning of marine tourism an integrated development of all elements of cruise ship
industry and corresponding regional tourism and port infrastructure is necessary (Papatha-
nassis, 2016, p. 170). Over the past five years, the number of ship entries to the ports of Ukraine
increased by 40% while number of passengers by 53.4%. Most often, the Black Sea region is
visited by tourists from Germany, Great Britain and Italy. The share of cruise tourists from
the CIS countries in the ports of Ukraine is 6.1%, while in 2012 for example it was less than 1%.
According to experts, the low efficiency of the implementation of cruise business develop-
ment programs and maritime infrastructure modernization were due to insufficient inflow of
investments related to the unfavorable investment climate in Ukraine (Nezdoyminov, 2015).
138
Athens, 26 May 2015 – CLIA Europe, the association representing the 40 billion euro cruise in-
dustry in Europe, and MedCruise, the association of cruise ports in the Mediterranean and its
adjoining seas, have signed a strategic partnership agreement to collaborate, sponsor and sup-
port the advancement of a European travel agent training program. Set up in Rome in 1996,
MedCruise is the Association of Mediterranean Cruise Ports. MedCruise’s mission is to pro-
mote the cruise industry in the Mediterranean and its adjoining seas. The Association assists
its members in benefiting from the growth of the cruise industry by providing networking,
promotional and professional development opportunities. Today, the association has grown
to 74 members representing more than 100 ports around the Mediterranean region, including
the Black Sea, the Red Sea and the Near Atlantic, plus 31 associate members, representing
other associations, tourist boards and ship/port agents. Countries represented in MedCruise:
Croatia, Cyprus, Egypt, France, Georgia, Gibraltar, Greece, Italy, Malta, Monaco, Montene-
gro, Portugal, Romania, Russia, Slovenia, Ukraine, Spain, Syria, Tunisia, Turkey. MedCruise
members in Black sea are Batumi, Constantza, Odessa, Sevastopol, Trabzon, Sinop, Sochi. The
total of cruise passenger visits at the 72 MedCruise port members for which data are available
in 2014 reached 25,8 million (Fig. 2). Comparing to the previous year, this number is 7,28% lo-
wer, as the cruise passenger movements that had taken place in 2013 were 27,8 million (CLIA
Contribution of Cruise Tourism to the Economies of Europe – 2014, n.d.).
Fig. 2. Cruise passengers growth on MedCruise ports (2000–2014)

Source: CLIA Contribution of Cruise Tourism to the Economies of Europe – 2014, n.d..
As for Ukraine, the ports of the Black Sea region have enough great potential for the
development of cruise tourism. In the basins of the Caribbean and Mediterranean Seas
cruise ship are crowded. The fight for customers makes the cruise companies to seek new
markets for their services. Black Sea region is suitable for this like no other, because, in
fact, is part of a Mediterranean cruise market. An estimated 6.12 million cruise passengers
embarked on their cruises from European ports in 2015. The European market has grown
by 111% over the last ten years but with economic growth moderating over the past five
years, European-sourced passengers have only increased by about 18% since 2010 (CLIA
Contribution of Cruise Tourism to the Economies of Europe – 2015, n.d.). As the 2015 data
show, tourists from the Black Sea countries (Russian Federation, Ukraine and Georgia)
make up to 1.7% of the European cruise market (Table 3).
139
Table 3. Cruise Passengers by Country of Embarkation, 2015
Country Passengers Share of Total
Italy 2,000,000 32.7%

Spain 1,282,000 20.9%
UK 1,060,000 17.3%
Germany 584,800 9.6%
France 309,600 5.1%
Greece 201,200 3.3%
Denmark 185,000 3.0%
Sweden 92,800 1.5%
Netherlands 86,000 1.4%
Malta 70,300 1.1%
Cyprus 33,000 0.5%
Croatia 31,400 0.5%
Norway 24,900 0.4%
Other EU + 3 56,900 1.0%
EU+3 6,017,900 98.3%
Other Europe 1
104,400 1.7%
Total 6,122,300 100.0%
1 Russia, Georgia and Ukraine.
Source: CLIA Contribution of Cruise Tourism to the Economies of Europe – 2015, n.d..
Ukraine could initiate establishment of an international cruise cluster of ports of the

Black Sea. Black Sea by its geographical location is not transit, therefore, in order to stand
out in an independent direction for mass cruise tourism at least five ports should have infra-
structure capable of handling vessels up more than 300 m. Today this infrastructure have two
Black Sea ports – Odessa (Ukraine) and Constanta (Romania). Now the modernization of
facilities for receiving passengers is going on in ports of Burgas (Bulgaria), Sochi (Russia) and
Batumi (Georgia). After this the Black Sea region can declare itself as cruise ship direction for
the mass segment (Yatsyna & Nezdoyminov, 2016, p. 186). The cruise market in Ukraine is in
a state of decline. According to the operative data of the Department of Tourism Service and
European integration of the Port Authority, the number of passenger ships’ visits to Odessa
in 2015 was 13, which is 15 ship calls less than last year and 93 ship less than in 2013. For the
season 2016 the port administration has already received 33 requests for visits by cruise ships.
However this number may vary in one and in the other direction, depending on many
factors. Among the negative factors the first place can be given to the transformation of the
Crimea in “gray” area for cruise line operators. The historically formed ship courses Odessa
– Yalta, Odessa – Yalta – Sevastopol were brands in the regional market. Odessa, by itself, re-
main is very hospitable and very attractive place for tourists, but it cannot recoup the costs of
the charterer in the north-western part of the Black Sea. However, positive things do occur.
Thus the administration of the Odessa seaport successfully passed the audit of quality mana-
gement system for compliance with ISO 9001-2008. A certified quality system improves the
140
production activity of the company, strengthens its image, competitiveness and investment
attractiveness of the market, allows to expand the range of services. Through membership in
MEDCRUISE (since 2008), the port of Odessa failed to effectively implement several image
projects, gave table impulse to the development of the industry of sea travel in the Black Sea
region. Among other things, it should be noted the success of the international conference
Black Sea Cruises. But the main result of this partnership, of course, was an increase in the
number of visits to Odessa cruise ships under foreign flag in 2013 (more than 100 calls).
The local authorities should take into account the experience of the development of cruise
tourism in Dubrovnik. Further development of cruise tourism will depend exclusively on the
dynamics of solving the existing issues, organisation of demand management and destination
product (Perucic & Puh, 2012, p. 214). Using the responsible tourism lens to view cruise tourism
can be a useful exercise. It helps focus the analysis of ‘sustainability’ on the local community
and stakeholders that are effected by cruise tourism (Klein, 2011, p. 107). Another big problem
of the cruises industry (especially in some areas of the Mediterranean and Black Sea) is the lack
of modern port infrastructure, appropriate new passenger ships (larger, faster, more luxurious,
etc.) in several ports, and the existence of different national regulations on environmental
protection, safety of the ship, navigation and passengers etc. So, it is necessary that contrac-
tual and economic relations between ports and cruise companies are developed as long-term
projects. This cooperation should not be just a business relationship but a complex “contract”
for cooperation between companies – local and central authorities, ensuring sustainable de-
velopment of tourism areas, directly related to economic efficiency, environmental marine
and terrestrial protection. A good example would be that of cooperation between airlines and
airports in many parts of the world, even if they are different realities. Another concern is the
uncertainty of political, social and military field in some destinations in North Africa, Eastern
Mediterranean and Black Sea. Political and economic stability are critical factors on business
and management and marketing of passenger companies. The Arab Spring, instability that was
installed in the area, the war in Syria, piracy, terrorist threats, the crisis in Ukraine have forced
companies to rethink their strategy quickly and suddenly change their itineraries planned,
with serious economic repercussions on the profitability of companies, and the planned tourist
destinations, now avoided due to high degree of risk (Bosneagu, Coca & Sorescu, 2015, p. 350).
Over 120 representatives from marine travel industry companies will participate in
the 48th MedCruise General Assembly of Mediterranean and Black Seas cruise Ports. The
forum of the world’s largest association of cruise operators and ports has been opened 22
June 2016 with a briefing at the conference hall of «Bristol» hotel in Odessa. According to
the organizers, the representatives of the Directorate from over 70 companies that define
the 2/3 routes of the world’s cruise fleet attend the event. Among them are the famous cor-
porations such as Royal Caribbean Cruise Line, Holland America Group, MSC Crociere,
Azamara Cruises, Costa Crociere, SilverSea and others. This major cruise event was de-
dicated the celebrations of the 20 years of the Association. During the General Assembly
meeting, MedCruise member representatives together with other esteemed guests will di-
scuss the latest developments of the cruise sector, as well as the implications and prospects
of cruising in the Med and its adjoining seas. The position of Odessa as an international
tourist center, will carry information about South Palmyra, as a safe, economically attrac-
tive city with a rich historical cultural heritage and natural and recreational potential, will
present profitable opportunities of passenger terminal in Odessa port.
141
Professionals believe that modernization of the port infrastructure will annually

increase number of ship entries in Ukrainian ports by 10–15% and will help to receive
annually not less than 60 thousand tourists, flatten seasonality and provide jobs for the
tourism industry (Gerasimenko, Galasyuk & Nezdoyminov, 2013, р. 283). It will subsequ-
ently attract another international cruise operators to the Black Sea basin. The develop-
ment of passenger complex of Odessa seaport presupposes the following: bring the design
capacity of the complex – to 1 million passengers; length of berths – to 1370 meters; depth
at the berth – 11.5 meters. The total cost of the investment project realization equals to
120 million UAH.
Conclusions
This way, timely analysis of factors and general market tendencies which influence the
state of tourism flow will offer economic instruments of regional tourism and recreation
sphere development stimulation create directions of regional strategies on attraction of
tourists. Following to the data of the conducted research, formation of certain tendencies
on the structure of tourist flow in Odessa region can be noted:
⁃⁃ decline of tourists activity reflects not only state of inner market environment but also a
tourism reputation of Ukraine among world markets, that influences investment attracti-
veness of the field and regions;
⁃⁃ tendency of outbound flow prevailing over inbound that negatively affects net tourism
balance in Odessa region;
⁃⁃ in the structure of tourism flow bigger share consists of the trips with “leisure and recre-
ation” purpose while business, medical, sport and specialized tourism contain potential for
the development by means of special measures conduction;
⁃⁃ the rise of Odessa region tourism field level can be observed in distribution pattern in
Ukraine as a whole according to the tourism types and in relative terms due to exclusion of
Autonomous Republic of Crimea, Sevastopol and Donetsk region from the tourism market;
⁃⁃ motivation and geographic factors of influence on the distribution of tourist flow of inbo-
und and outbound tourism are worth noting.
Positioning of Ukraine as a maritime state requires a consideration of global trends
in world maritime trade and keeping those trends that occur in the Black Sea region. The
necessity of the development of national marine economy and port infrastructure is dicta-
ted by the high profitability of market cruise services through a world-recognized compe-
titive advantages of waterway transport (environmental friendliness, low cost, investment
attractiveness, etc.). Thus, government authorities, port and cruise business entrepreneurs
need to make significant efforts to promote Black Sea tourist region in the European
market of cruise tourism. The development of cruise shipping stimulates the development
of related sectors of the regional economy (hospitality, catering, transport, shipbuilding,
ship repair, etc.). It promotes investment, creates a multiplier effect for regional economic
development, and therefore – helps to create new jobs.
142
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143
Chapter 11.
LOGISTIC MANAGEMENT APPROACH TO
THE MACHINE-BUILDING ENTERPRISES
IN THE PERIOD OF GLOBAL CHALLENGES
Olena Chukurna, Vitalii Nitsenko, Siti Zaleha Omain
1. Assessment of the influence logistics costs of price policy machine-

-building enterprises of Ukraine in the conditions of globalization
T he pricing policy of engineering enterprises in the global economy is character-

ized by the transformation of its principles, methods and factors. In place of
the traditional approach to the formation of price policy, based on the combined effect
of three factors to establish prices (demand, costs, competition) comes a new approach
to pricing in the global economy. At the present time, globalization is characterized by
the system integration of global markets and regional economies, in all spheres of human
activity, with the result that there is an accelerated economic growth, the acceleration of
the introduction of modern technologies and management practices. At the same time,
the changes caused by the processes of economic integration, are of a profound nature,
affecting all spheres of activity, put the task of bringing into line the social dimension of
development of society, its political structure, macroeconomic management technologies.
Over the past years the greatest influence on the processes of globalization have increased
international competition, the growth of transaction costs and the emergence of new ap-
proaches and methods of transfer pricing. The last two factors directly influenced the
transformation of the concept of pricing. Moreover, to strengthen the role of global eco-
nomic processes, influenced the development of global logistics. In these conditions had
increased the role the impact of logistics costs on pricing and general price policy of in-
dustrial enterprises. In the context of globalization, in the structure of prices of products
of industrial enterprises occupy a considerable share of logistics costs. In its turn the main
motivating factors in the impact of globalization on the development of modern logistics
is rapid economic growth and the increase in corporate profits. The need for development
of new markets to maintain a sustainable growth was the main driving force behind the
company’s customers to look beyond areas of national economy. The main driving force
behind globalization, logistics has become common among manufacturers and major dis-
tributors of business focus on the supply chain as a whole. Earlier the logistics engaged in
the reduction of supply and production costs within individual companies. Traditionally,
companies have sought to keep the logistics process under its full control, trying to inde-
pendently carry out a greater number of the most important operations and functions.
This focus on internal activities are usually meant the content of private depots, fleet and
processing systems. With the spread of globalization, the practice of organizing logistics
operations has shown that a more effective method of doing business is the application
of logistics outsourcing. This meant the transfer of logistics functions to intermediaries,
which was accompanied by the formation and structuring of logistics costs on processes
rather than by function. That is, the emergence of global supply chains, when it involves
the development of business expansion beyond the national borders and the formation
of entire business areas in other regions and countries, has caused the need to address
logistics costs for each business process. This approach allows us to calculate the cost-ef-
fectiveness of logistics operations for each line of business. Under these circumstances, it
is necessary to assess the impact of logistics costs Ukrainian industrial enterprises in the
pricing policy of industrial enterprises.
In the process of writing, the following economic-statistical methods: regression-cor-
relation analysis to identify the most correlations between logistics costs affect pricing; sys-
tematization methods to form conclusions and recommendations for improving the pricing
policy of industrial enterprises in the light of its assessment of the impact on logistics costs.
In order to evaluate the logistics costs on the price policy machinery enterprises has
been analyzed the overall financial result from the sale of products and the share of logistics
costs in the income of enterprises. The object of the analysis made by the machine-build-
ing enterprises of Ukraine such as: Public Joint Stock Company (PJSC) «Azovzagalmash»,
PJSC «Dneprovagonmash», PJSC «Kryukov railway car building plant», PJSC «Stakha-
nov Wagon Works», PJSC «Umanfermmash» and the State Enterprise «Pervomaiskdie-
selmash». The first four engineering companies related to the sector of car building and
occupy a leading position among Ukrainian companies – exporters. That price policy of
export-oriented enterprises influenced by global factors on world markets. In the emerg-
ing global supply chain logistics costs are increasing on the promotion of products to the
final consumer, so price competition is becoming one of the principal methods of compe-
tition in the international markets of engineering products.
Fig. 1. The rate of profitability on the Ukrainian enterprises of mechanical ngineering

Source: based on the source data.
146
Chapter 11. LOGISTIC MANAGEMENT APPROACH to THE MACHINE-BUILDING ENTERPRISES IN THE PERIOD OF GLOBAL CHALLENGES
At the present time price policy of Ukrainian machine-building enterprises formed

by a costly method of pricing. The main factor influencing the pricing is the rate of prof-
itability in the industry, which affects the formation of a lower price limits. According to
the State Statistics Committee of Ukraine (State Statistics Service of Ukraine, 2016), the
average rate of profitability in the industry ranges from 3.6% to 6.2% (Fig. 1). From Fig. 1
exceeding the levels of profitability seen by industry engineering compared to the average
level for the industry of Ukraine.
The cost method of pricing for the products of the machine-building enterprises is
a key in setting prices in the industry, which is confirmed by the author of the calcu-
lations undertaken. With the help of the regression-correlation analysis of correlations
were found between the cost and the weighted average price for the products of the ma-
chine-building enterprises. Results are presented in Table 1.
Table 1. Correlation influence the cost of the weighted average price for the products of
Ukrainian machine-building enterprises
The correlation coefficient
administrative
products sold
distribution
costs (Х3)
industry
costs of
cost of
(Х2)
(Х1)
PJSC „Azovzagalmash“ railway coach manufacturing -0,39 -0,035 0,15
PJSC „Dníprovagonmash“ railway coach manufacturing 0,89 0,89 0,89
PJSC „Kryukívskiy railway
railway coach manufacturing 0,97 0,58 0,66
coach manufacturing plant“
PJSC „Stakhanovskiy railway

railway coach manufacturing 0,53 0,41 0,51
PJSC „Umanfermmash“ farm machine industry 0,80 0,93 0,92

Source: developed by the author based on the basis of Financial reporting of machine-building enterprises, 2016.
These calculations confirm that the machine-building enterprises are guided by

the cost approach, since all characterized by a high impact on the cost of the average
price. The only exception is PJSC “Azovzagalmash”, where the inverse effect is observe
on the marketing costs have a high influence on the price only in the PJSC “Umanferm-
mash» (R = 0.81). The average effect on the price of the costs of distribution are in PJSC
“Dneprovagonmash” and PJSC “Kryukov railway car building plant» (R = 0.60 and R =
0.58). The greatest impact of administrative costs on the weighted average price observed
in the PJSC “Umanfermmash» (R = 0.93). Such cost items as “distribution expenses” and
“administrative costs” refer to the logistics costs. It can be concluded about the high im-
pact of logistics costs on the pricing of engineering enterprises. It should be noted that
the values of correlation coefficients for the analyzed parameters in all enterprises are in a
different range. However, common to the trend is the high impact of logistics costs on the
average price, which is clearly shown in Fig. 2.
147
Fig. 2. Correlation of the main elements of the structure of weighted average prices for
engineering products
Carried out calculations showed that the overall level cost structure of the weighted
average price of all engineering companies is quite high (Table 2). At the same time, in 2012
the level of expenditure in the sector was the largest. Since 2013, the mechanical engineering
of Ukraine is in a difficult transition conditions that directly affect the basic performance
of the industry and the financial stability of virtually all companies that were analyzed.
Table 2. The overall level of costs in the structure of weighted average prices for the
products of mechanical engineering enterprises (%)
manufacturing plant“
PJSC „Stakhanovskiy
manufacturing plant
„Dníprovagonmash“
PJSC „Kryukívskiy
„Umanfermmash“
„Azovzagalmash“
railway coach
railway coach
PJSC
PJSC
PJSC
Year
„
2008 70.3 75.16 72.46 87.92 80.69

2009 62.9 87.82 91.96 101.59 84.50
2010 70.9 73.13 81.16 92.16 82.70
2011 93.9 65.30 78.92 96.99 80.26
2012 108.9 99.36 85.79 107.17 82.69
2013 1.2 59.12 89.45 604.79 61.14
2014 5.05 75.16 99.06 359.37 50.25
Source: developed by the authors based on the data (Financial reporting of machine-building enterprises, 2016).
At the same time, the scientific and practical interest is the system for assessing the
impact of logistics costs on the overall financial results of Ukrainian enterprises. Currently,
there is the problem of assessing the efficiency of logistics costs, as in the financial statements
148
of the entities are aggregated costs typically accounting for items of management accounting.
With this approach, there is no way to determine the costs associated with the implementa-
tion of individual works or formation of certain supply chain and operations. Cost grouping
practices in normative accounts, such as wages, selling expenses, administrative expenses, de-
preciation, does not allow to recognize or establish a framework of operating responsibility
of logistics costs. If the company generates financial reports for each type and direction of the
business, it facilitates the analysis of logistics costs, but does not fully meet the requirements
of the general costs of analysis. Under these circumstances, it is necessary to assess the impact
of logistics costs Ukrainian industrial enterprises on the overall performance of their profi-
tability. This will identify the greatest influence of certain types of expenses on total revenue
of industrial enterprises and to show the most problematic areas in the financial reporting.
To implement this task, the regression-correlation analysis method was used. Financial
information leading Ukrainian machine-building enterprises have been used for the analysis.
From the shape of the balance sheet have been used items such as “reserves”, “work in pro-
gress (WIP)”, “finished goods” and “goods” that can be correlated with the logistics costs of
inventory management. From the form of the Report on financial results were analyzed by
the article “costs of distribution” and “administrative costs”, which are also presented logi-
stical costs. The results of calculation of the impact of logistics costs on the income from the
sale of machine-building enterprises are presented in Table 3. As can be seen from Table 3, all
of the analyzed companies on the income from the sale is greatly affected by the level indu-
strial stocks and cost of sales, as evidenced by the high values of the correlation coefficient.
For these two articles logistics costs correlation coefficient ranges from 0.62 to 0.91. Admi-
nistrative costs have an impact on the average income of the machine-building enterprises.
Table 3. Summary table of the results of the calculation of the impact of logistics costs on the
income from the sale of machine-building enterprises with the help of the correlation coefficient
The correlation coefficient (elements of logistics
costs for items in the financial statements)
finished goods
distribution
rative costs
Enterprise Industry
administ
supplies
costs of
goods
WIP
railway coach
PJSC „Azovzagalmash“ 0.85 0.45 -0.11 0.078 0.87 0.51
manufacturing
railway coach
PJSC „Dníprovagonmash“ 0.87 0.94 0.57 0.0092 0.91 0.72
manufacturing
PJSC „Kryukívskiy railway railway coach
0.77 0.24 0.64 -0.27 0.82 0.45
coach manufacturing plant“ manufacturing
PJSC „Stakhanovskiy railway railway coach
0.79 0.57 -0.25 0.00 0.84 0.64
PJSC „Umanfermmash“ farm machine industry 0.83 -0.076 0.25 0.27 0.62 0.53
149
The maximum value of the correlation coefficient high cost of this article observed
in PJSC “Dneprovagonmash” (0.72), indicating a high level of the impact of administra-
tive costs on the income of that enterprise. At PJSC “Umanfermmash” and PJSC “Azo-
vzagalmash” observed average the impact of administrative costs on the income of these
enterprises. As such kind of logistics costs, as “finished goods” high levels of correlation
coefficient observed in PJSC “Dneprovagonmash” (0.57) and PJSC “Kryukov railway car
building plant” (0.64). The low values of correlation coefficient on article “finished goods”
all other engineering companies reflecting a reduction of logistics costs by reducing stocks
of finished goods in warehouses.
This progressive business practice, typical for the B2B market, when the amount of
goods manufactured fully meets the demand, representing a decrease costs of storage of
finished products in stock. Carried out calculations lead to the conclusion that the overall
trend for all engineering companies is a high impact on income of these companies as such
articles logistics costs as inventories on the distribution and administrative costs. Such
articles of logistics costs as construction in progress and finished goods are of low value of
the correlation coefficient, which indicates the absence of their impact on the engineering
business income.
Table 4. The level of logistics costs in the structure of income from sales of wagon companies
of Ukraine (%)
PJSC „Kryukívskiy PJSC „Stakhanovskiy
PJSC „Azov- PJSC
railway coach railway coach
zagalmash“ „Dníprovagonmash“
manufacturing plant“ manufacturing plant“
Level of administ rative

Level of Supplies, %
Level of costs of
Level of costs of
Level of costs of
Level of costs of
distribution, %
distribution, %
distribution, %
distribution,%
Year
costs, %
costs, %
costs, %
costs, %
2005 2,02 1,9 2,1 7,9 2,1 4,1 10,4 1,3 2,75 4,1 1,7 5,46
2006 2,5 1,3 1,7 13,6 1,5 5,6 16,1 1,8 2,1 9,8 1,3 8,3
2007 5,8 1,6 1,7 12,4 2,6 4,2 13,04 0,1 1,91 4,03 1,05 5,58
2008 2,9 1,5 1,9 10,3 1,5 2,68 10,9 0,7 1,6 7,99 1,3 5,51
2009 3,2 1,7 2,7 35,1 3,5 9,5 21,22 2,8 2,63 13,74 4,1 6,48
2010 5,1 3,9 1,3 676,3 121,9 1,9 9,22 1,4 1,4 1,92 1,2 2,26
2011 4,1 3,1 1,3 6,02 1,25 1,6 10,14 1,4 1,02 5,4 0,63 1,92
2012 4,6 5,0 1,5 5,48 1,2 1,6 9,52 1,3 1,07 5,61 0,89 2,90
2013 302,8 177,7 188,9 72,34 10,3 30,7 14,06 2,1 2,8 35,2 7,03 34,0
2014 675,6 297,3 476,3 532,7 101,9 209,9 304,3 27,3 51,7 76,66 4,6 70,0
150
If we consider the level of logistics costs in the income structure of the machine-buil-
ding enterprises, it can be seen that the highest share occupied by industrial stocks, the
level of which for 2013–2014 all enterprises increased sharply (Table 4) and (Fig. 3). This
shows that all car-building industry companies have high costs of creating of inventories
of raw materials.
Fig. 3. Levels of Supplies in the income structure of the machine-building enterprises of

Ukraine
This tendency is accompanied in this period, as a sharp decline of Manufacture railcar

production.
The analysis of the financial stability of the Ukrainian enterprises railcar showed that
from 4 companies was analyzed, only PJSC “Azovzagalmash” has negative indicators of
solvency and financially unstable over the last 6 years. Since 2013–2014 PJSC “Kryukov
railway car building plant” is also in a state of crisis. The other two main producers of cars
PJSC “Dneprovagonmash” and PJSC “Stakhanov Wagon Works” have absolute financial
stability. Recently there has been a significant falling of volumes of production and pri-
ces for freight rolling stock (primarily on the open wagons), the main reasons for which
are: falling of volumes traffic on the railroad, low rental rates for cars and surplus freight
rolling stock in the transport market. In addition, the PSC “Azovzagalmash” and PJSC
“Dneprovagonmash” have a complex organizational structure of the holding, within which
there are companies that are registered in offshore zones. This fact creates the basis for the
use of transfer pricing methods, which is also an important factor of influence on strategic
pricing decisions.
The level of administrative costs is also quite high in PJSC “Azovzagalmash” and PJSC
“Dneprovagonmash”. It should be noted that the highest level of overall logistics costs observed
in PJSC “Azovzagalmash”, which is in the area of financial instability in recent years (Fig. 4).
151
Fig. 4. Levels of administrative costs in the income structure of the machine-building

enterprises of Ukraine
The volume of total production car-building industry depends largely on the prevail-
ing market environment, primarily on the demand for products. One of the most import-
ant factors that affect the demand for car-building products, is the structure of the rolling
stock freight wagons in the CIS countries and their degree of amortization. According to
statistical data, the largest capacity of freight railcars park is characterized by the market
of the Russian Federation, the share of which amounts to 71.63% on the market of the
Customs Union and the CIS countries. The second largest market of carrying capacity
of freight wagons is the market of cars in Ukraine, which occupies 10.89% and in third
place – Kazakhstan’s market share which the weight is 7.14%. The second most important
factor which influences the development of car-building industry is its focus on foreign
markets. Given the engineering specifications of cars produced by the machine-building
enterprises of the countries of the “1520”, we can say that they are focused only on the mar-
kets of CIS countries, the Baltic States and Mongolia, which have a width of 1520 mm. All
the major car-building Ukrainian enterprises, which include the PJSC “Azovzagalmash”,
PJSC “Dneprovagonmash”, PJSC “Stakhanov Wagon Works” and PJSC “Kryukov railway
car building plant”, 95% of products sold in foreign markets and are dependent on exports.
The main country of export of Ukrainian production of cars is Russia, which exported
about 89.7% railcar production, in Kazakhstan – 9.3%, Latvia – 0.25%, in other countries –
0.75%. Thus, most of the factors the impact of the pricing in mechanical engineering has an
objective character that is associated with the situation on the global engineering market.
Considering the nature of the export car building industry, interesting is the fact
that the low level of selling expenses at a high correlation coefficient of such companies
as: PJSC “Stakhanov Wagon Works” and PJSC “Kryukov railway car building plant” (Fig.
5). The highest levels of costs of sales in the income structure observed in PJSC “Azovza-
galmash” and PJSC “Dneprovagonmash”. At the same time, in PJSC “Azovzagalmash” in
2012 all increased logistics costs connected with falling demand for its products and the
general state of crisis of the enterprise.
152
Fig. 5. Levels of costs of distribution in the income structure of the machine-building

enterprises of Ukraine*
Let us consider the impact of logistics costs on the cost of production of machine-
-building enterprises with the help of the correlation coefficient (Table 5).
These calculations are presented in Table 5 indicate a high degree of influence of such
articles logistics costs as “Supplies”, “costs of distribution” and “administrative costs” the
cost of production of machine-building enterprises. The correlation coefficients for these
items cost in all businesses demonstrate strong interconnection between logistics costs
and their impact on costs of production.
Table 5. Summary table of the results of the calculation of the impact of logistics costs on the
cost of production of machine-building enterprises with the help of the correlation coefficient
The correlation coefficient (elements of logistics costs
for items in the financial statements)
Enterprise industry
administ
supplies
finished
costs of
bution
distri-
goods
goods
rative
costs
WIP
railway coach
PJSC „Azovzagalmash“ 0.96 0.43 0.002 -0.014 0.95 0.87
manufacturing
railway coach
PJSC „Dníprovagonmash“ 0.92 0.91 0.57 -0.024 0.92 0.85
manufacturing
PJSC „Kryukívskiy railway railway coach
0.94 0.55 0.72 -0.37 0.90 0.67
PJSC „Stakhanovskiy railway railway coach

0.82 0.64 -0.39 0.00 0.86 0.72
farm machine
PJSC „Umanfermmash“ 0.81 -0.038 0.27 -0.025 0.70 0.88
industry
Source: developed by the authors based on the basis of Financial reporting of machine-building enterprises, 2016.
153
These calculations the levels of logistics costs in the cost structure showed that all en-
gineering enterprises the highest level in the product cost structure occupied by industrial
stocks (Table 6).
Table 6. The level of logistics costs in the structure of production costs wagon enterprises
of Ukraine (%)
PJSC „Stakhanovskiy
PJSC PJSC „Dníprova- PJSC „Kryukívskiy railway
railway coach
„Azovzagalmash“ gonmash“ coach manufacturing plant“
manufacturing plant“
Level of administ
Level of administ
Level of administ
Level of administ
Level of costs of
Level of costs of
Level of costs of
Level of costs of
distribution, %
distribution, %
distribution, %
distribution,%
rative costs, %
rative costs, %
rative costs, %
rative costs, %
Year
2005 2,56 2,3 2,6 9,2 2,4 4,7 14,0 1,8 3,7 4,9 2,1 6,7
2006 3,14 1,6 2,1 16,5 1,9 6,7 20,6 2,3 2,7 12 1,6 10,0
2007 7,093 1,9 2,1 17,6 3,6 5,9 16,7 1,3 2,5 4,7 1,2 6,5
2008 3,79 1,9 2,4 15,7 2,3 4,1 15,5 0,9 2,3 9,9 1,6 6,8
2009 3,95 2,1 3,3 32,5 3,3 8,8 24,53 3,3 3,0 15,1 4,5 7,1
2010 6,5 4,9 1,7 9,4 1,7 2,6 11,7 1,8 1,8 2,3 1,4 2,7
2011 5,62 4,3 1,7 8,6 1,8 2,3 13,2 1,9 1,3 6,7 0,8 2,4
2012 5,01 5,5 1,6 8,7 1,85 2,5 11,4 1,5 1,3 6,2 1,0 3,2
2013 4,32 2,6 2,7 12,4 1,7 5,2 16,7 2,5 3,3 6,3 1,2 6,1
2014 13,53 5,9 9,5 32,7 6,3 12,9 17,9 1,6 3,05 27 1,6 24,6
Source: developed by the authors based on the data (Financial reporting of machine-building enterprises, 2016).
The highest rates of the proportion of industrial stocks in the structure of production
costs observed in PJSC “Dneprovagonmash” (Fig. 6).
Fig. 6. Levels of Supplies in the cost structure of machine-building enterprises of Ukraine

154
Fig. 7. The levels of administrative costs in the cost structure of machine-building

enterprises of Ukraine
Fig. 8. Cost Levels on distribution of in the cost structure of machine-building enterprises

of Ukraine
Summing up the assessment of logistics costs in the pricing machine-building en-

terprises can make the following conclusions. The general trend for all machine-building
enterprises is a high impact on the incomes of these companies such articles logistics costs,
as inventories on the marketing and administrative costs. Such articles of logistics costs as
construction in progress and finished goods are of low value of the correlation coefficient,
which indicates the absence of their impact on the engineering business income.
Analysis of logistics costs in the income levels of the structure and the cost structure
indicates the high values of inventory levels in all business sectors. At the same time,
inventories in recent years had increased sharply in all of the analyzed companies, which
also been accompanied by growth of selling expenses. Considering the orientation of en-
gineering products to foreign markets, the growth of the logistics costs reduced their com-
petitiveness and increases the final price.
155
For Ukrainian engineering industry can identify the following risks that affect the
overall development of the industry and its pricing policy:
⁃⁃ The saturation of the market demand for engineering industry, especially in the car building
industry, and a tendency to reduce its capacity. The market of car-building there is limited de-
mand for cars of Ukrainian production, because of their technical orientation to the size of 1520.
⁃⁃ The political crisis in Ukraine. Due to the fact that Russia and the CIS countries is the main
market for engineering industry and car production, customer worries on placing of orders at
Ukrainian enterprises is a significant risk the implementation of Conservation production plans.
⁃⁃ War risks related to the military activities of the ATO, resulting in destroyed many Indus-
trial objects, railway infrastructure and others. A large area on the border of Ukraine and
Russia not controlled by Ukrainian customs and border guard units, which makes it impos-
sible traffic and material values.
⁃⁃ Dependence on monopoly position in matters of cars Russian system of certification.
⁃⁃ The introduction of protectionist measures by the Russian authorities through the intro-
duction of quotas on imports of engineering products.
⁃⁃ The timely compensation of VAT is one of the most important factor in balancing of cur-
rent assets, because exports is 95%, and all production is energy-intensive and material-in-
tensive, most of the funds accumulated precisely in VAT.
⁃⁃ Low transparency of cash flows and the use of transfer pricing in payments between affiliates.
⁃⁃ A negative value of equity and low share liquidity.
The calculations allowed a conclusion that the pricing policy engineering enterprises
based on cost method of setting the price at which the structure of the highest influence
costs, administrative costs and sales costs. Correlation and regression analysis showed that
the greatest impact on the cost structure have inventories, the level of which has increased
sharply in recent years. As a whole, carried out calculations indicate a high impact of logi-
stics costs on the pricing policy of engineering enterprises. However, many enterprises of
the industry in the formation of prices take into account the costs are lower prices abroad.
The upper boundary of the price is determined by factors such as: demand, versatility and
uniqueness of the equipment and the level of competition on foreign markets. These factors
have play a critical role in determining the final price. When determining the price of the lo-
gistics cost (the cost of inventories) is taken into account in prime cost of finished products,
as part of the costs (distribution of costs) are taken into account when establishing the
final price. In this situation it is difficult identify and assess the logistical costs of logistics
operations. The financial statements do not have the opportunity to see the full range of
logistics operations and to calculate the efficiency of each of these operations. Moreover, it
is impossible to see the added value that is created at each stage of the logistics supply chain.
2. New approaches to the classification of logistics costs of industrial

enterprises in the conditions of globalization
The main motivating factors of influence of globalization on modern logistics develop-
ment is rapid economic growth and increasing company profits. The need for the develop-
ment of new markets for sustained growth was the main driving force that prompted the
company to look for customers outside of the national economy. The main driving force of
156
logistics globalization has become common among the manufacturers and big distributors
orientation of the business on the logistics chain as a whole. Earlier logistics was engaged in
the reduction of costs of procurement and production within the framework of individual
companies. Traditionally, enterprises tried to keep the logistics process under its full con-
trol, trying to self-perform a greater number of the most important operations and func-
tions. This orientation on the internal operations are usually provided large logistics costs
on the operation of private warehouses, transport fleets and processing systems. With the
spread of globalization, the practice of the organization of logistics operations have shown
that a more efficient method of doing business, is the application of logistics outsourcing.
This meant the transfer of logistics functions to intermediaries, which was accompanied
by the formation and structuring of logistics costs on processes, not functions. That is,
the emergence of global supply chains, when business development is associated with its
extension beyond national boundaries and the formation of several business areas in other
regions and countries has given rise to the need of the accounting of logistical expenses
for each business process. This approach allows us to calculate the economic efficiency of
logistic operations for each line of business. Currently, however, there is a problem such
assessment of efficiency of logistics costs because of financial reporting costs aggregated
usually accounting articles management accounting. According to this approach, there
is no way to determine the costs associated with certain activities or by the formation of
certain supply chain and operations. The practice of grouping costs in the regulatory ac-
counts, such as wages, distribution costs, administrative expenses, depreciation, does not
allow to identify or to establish the scope of the operational responsibility for logistical
costs. In the event that the company prepares financial statements for each type and di-
rection of the business, it facilitates the analysis of logistics costs, but does not fully meet
the requirements of the analysis of the total cost. In the circumstances there is a need to
evaluate the impact of logistics costs of Ukrainian industrial enterprises on the total of
their yield. This will reveal the greatest impact of individual types of costs in total revenue
of the industrial enterprises and show the most problematic areas in financial statements.
Special attention deserves the issue of accounting in the financial statements of in-
dustrial enterprises, transport costs and the costs of inventory management. It’s two main
sources of logistics costs in the economy of industrial enterprises, which are not fully
reflected in the balance sheet. Regarding transport costs, it should be noted that in re-
porting industrial enterprises they are recorded in the article “cost of sales” and in the
practice of retailers, transport costs are charged to costs of treatment, is considered as
part of the cost of purchased goods. For industrial enterprises and retail businesses, it is
not possible to allocate this type of logistics costs. Of the articles of the aggregate balance.
With regard to the inability of cost accounting to inventory management in the financial
statements of industrial enterprises, this problem includes two aspects. First, statements
have not painted the full costs associated with the maintenance of stocks, and secondly,
the financial costs associated with the “freezing” of working capital in inventories of raw
materials and goods, unfinished production and stocks of finished products, not possible
to accurately set, measure, and separate from other forms of capital expenditure incurred
by the company. This is partly possible only in the case of the same kind of business, but
not in the case of multi-operational business. Despite the fact that Ukrainian enterpris-
es have implemented the international standards of financial accounting, there are still
157
some differences in financial accounting from different countries of the world. It can be
stated the fact that there is a need to improve the traditional accounting methods of cost
accounting that will allow you to track logistics costs by types of activities. In particular,
in the financial statements is necessary to allocate two main sources of logistics costs:
transportation costs and costs of inventory management.
Analysis of recent researches and publications In scientific literature much attention
is paid to estimating the cost of logistics operations in terms of the increasing role of
globalization and integration processes. The need to improve in this area of logistics has
led to the emergence of a large number of scientific publications of foreign and Ukrainian
authors. Problems of estimating logistics costs engaged in such foreign scientists as: Ron-
ald Lewis (1993), Michael O’Guin (1991), Robert S., Kaplan and H. Thomas Johnson (1987).
Despite the huge contribution to the theory of the classification and evaluation of logistics
costs, there is a need to perform the practice of assessment of logistics costs of Ukrainian
industrial enterprises. Among the Ukrainian scientists, the greatest contribution to the
development of the concept of logistics has made such scientists as: M.A. Oklander (2004),
E.V. Krykavsky (2004, 2006), N.I. Chukhrai (2006) etc.
However, the problem of accounting and assessing logistics costs is studied not deep
enough and requires more detailed study in the practice of Ukrainian industrial enterpris-
es. In addition, the principles of classification of logistics costs, which are presented in the
scientific works of these scholars differ significantly, due to differences in the perspectives
and directions of their research. Without specifying the requirements of national financial
reporting standards, most of the approaches to the classification of logistics costs can’t
be used in financial and management accounting The aim of the article is assessment of
influence of logistics costs of Ukrainian industrial enterprises on the overall yield that will
reveal the greatest degree of influence of individual types of costs in total revenue of the
industrial enterprises and show the most problematic areas in financial statements.
In accordance with traditional approaches of financial accounting logistics costs in-
clude the group of administrative expenses. The emphasis on this issue did the scientist
E.V. Krykavsky, who noted that logistics costs as the sum of the costs of management and
implementation of logistics processes within a certain range of movement of material
flows are not allocated for cost accounting of the enterprise. It is difficult to assess their
level and assess their performance. It is therefore important to define the criteria (charac-
teristics), classification (separation) of logistics costs.
In this context, the scientist offers to assess them at the place of occurrence; object
cost; the analytical account of expenses; the phases of the logistics process. E.V. Kryka-
vsky (2004) says the fact that, in practice, and economy-wide assessment of logistics costs
mainly classify logistic functions and spheres of movement of material flows, that is, the
costs of physical distribution, the costs of reserves and administrative costs. In this regard,
it should be noted that in the form of a balance sheet such items as: “supplies”, “WIP”,
“final goods” and “economic resources” refer to the working capital of the enterprise and
reflected in the second section of the Asset Balance. Such articles as: “distribution costs”,
“administrative expenses” and “operating expenses” reflected in the form of Report on
financial results. Thus, in practice, industrial enterprises carried out the calculations of
logistic costs from the data reporting forms, where it is impossible to allocate the costs of
each type of logistics operations and to calculate their effectiveness.
158
It is necessary to focus attention on the fact that the effectiveness of enterprise logis-
tics system is directly dependent on the organization of financial accounting of logistical
expenses. The lack of a proper level of financial accounting affects the lack of information
about logistics costs and inaccessibility for management. In fact, the accounting of logis-
tical expenses generates an information logistics system in the enterprise, which leads to
the development of a unified approach to the classification of logistics costs.
Currently there are the following two basic approaches to the classification of logistics
costs, which are based on the peculiarities of the organization of the material flow at an
industrial enterprise. If the functioning of the material flow is organized in separate func-
tions, the calculation of logistics costs is performed functional areas of logistics (Fig. 8).
This approach does not allow to allocate the costs of the individual logistics processes
to generate information about the most significant costs and the nature of their inte-
raction with each other. For example, to fulfill a customer’s order is necessary to carry
out the following operations: order taking, order processing, credit check, paperwork,
equipment ordering, shipment, delivery, invoicing. Thus, the costs associated with the or-
der fulfillment process consists of a variety of types of costs that occur in different areas,
and it is difficult to integrate them into a single item of expenditure in the framework of
the functional accounting. In addition, traditionally the costs together in large aggregates
that does not allow for a detailed analysis of the different origin of the costs to consider
in detail all the consequences of managerial decisions. As a result, decisions taken in one
functional area may lead to unexpected results in other related areas.
Fig. 8. The accounting system of logistical costs by function
Delivery Trans- Product- Stocks Sales

port ion
Business
process А
Business
process В
Business
process С
Costs by
function
85 110 180 230 95
Source: compiled by the author according to the Types and sources of logistics costs, 2016.
159
The second approach to the classification of logistics costs involves the introduction
of functional expenses all along the path of flow of material. The result of this approach
is the possibility of the accounting of logistical expenses for each business process, which
significantly affects the efficiency of logistics (Fig. 9).
Delivery Trans- Produc- Stocks Sales

port tion Costs by
operations
Business
process А 5 4 8 2 31
0 0 0 12 5 5
0
12
0
Business
process 1 3 6 9 4 23
0 0 0 0 0 0
Business
15
process С 2 4 4 2 3
5
5 0 0 0 0
Costs by
85 110 180 230 95 function
Fig. 9. The accounting system of logistical costs by the processes

Source: Compiled by the author according to the Types and sources of logistics costs, 2016.
In logistics, the key event and the object of analysis is a customer order and proce-
dures to implement this order. The costing should be used to determine whether a specific
order profit and how to reduce costs for its implementation. Cost accounting process
gives a clear picture of how are the costs associated with customer service and the share
of each of the units. Summing all costs across, you can determine costs associated with a
separate process, order, service, product, etc.
The focus should be placed on reducing costs, with the biggest shares in the total of all
logistics costs. As practice shows, the main components of logistic costs are transportation
and procurement costs (not more than 60%) and the cost of maintenance of stocks (not
more than 35%). Therefore, there is a need to highlight these two articles logistics costs in
the financial statements of the company.
This will allow to apply the system of accounting logistical costs for processes in the
practice of industrial enterprises.
160
Interesting approach to the classification of logistics costs, in our view, is the ap-
proach proposed by A.A. Andrukhova and I.A. Yakimov (2010). The approach proposed
according to the scholars proposed to divide logistics costs into 4 groups in which it is
necessary to record and evaluate. To such groups, they include the following:
⁃⁃ The costs of logistics (procurement management, order management, inventory manage-
ment, organization of transport, organization of warehouse activities and management wa-
rehouse technological process);
⁃⁃ Support costs production (technological processes control, managing orders in the pro-
duction, organization and storage of stocks in the shops inventory management, control
of production inventory production, support of standards of quality and logistic service,
organization of inplant technological transport, control methods, cost accounting for pro-
duction and calculation of production costs);
⁃⁃ The costs of distribution (transportation and warehouse activities, pricing, planning of
distribution channels, management of technological process of warehousing, inventory ma-
nagement, support of standards of product quality and logistic service);
⁃⁃ Spending on information technology (management of the consolidation process of logistics
costs and identify areas of information flow, cost control on the formation of information flows,
the creation and maintenance of a common management information and logistics system).
The authors of this approach to the classification of logistics costs allocate the costs of
information, which is an innovative approach. However, the proposed classification system
considers the logistics functions and provides accounting and cost estimation functions,
which makes it difficult to assess the effectiveness of all logistics operations in the company.
Table 7. Summary table of calculations of the impact of logistics costs on the income from
the sale of the machine-building enterprises with the help of correlation coefficient
The correlation coefficient (elements of
logistics costs for items in the financial
statements) administ rative
finished goods
Enterprise Industry
distribution
supplies
costs of
goods
costs
WIP
PJSC „Azovzagalmash“ railway coach manufacturing 0.85 0.45 -0.11 0.078 0.87 0.51
PJSC „Dníprovagonmash“ railway coach manufacturing 0.87 0.94 0.57 0.0092 0.91 0.72
PJSC „Kryukívskiy railway railway coach manufacturing
0.77 0.24 0.64 -0.27 0.82 0.45
PJSC „Stakhanovskiy railway coach manufacturing
0.79 0.57 -0.25 0.00 0.84 0.64
vagonobudívniy zavod“
PJSC „Umanfermmash“ farm machine industry 0.83 -0.076 0.25 0.27 0.62 0.53
SOE „Pervomaysk- production of diesel engines and
0.66 0.12 -0.22 0.00 0.75 0.82
dizelmash“ components for marine vessels
161
The authors of this study consider the classification of logistics costs on operations more
relevant and reflects the economic requirements to the enterprises in conditions of globalization.
Supplemented and improved by the author classification of logistics costs is represented in Fig. 10.
Depending on the changes scale of Permanent

activities
Variables
The cost of delivery

Depending on the source of incipience
Production costs
The cost of marketing adistribution
Direct
According to the method of referring to
the logistic processes
Coven
The costs of physical distribution and

The basic elements of logistics processes or promotion of products
Logistics costs
in logistics functions
Support costs and inventory
management
The costs of information processes
Material costs
The types of logistics costs

Intangible costs
Other expenses
Delivery to the consumer
For logistics operations Transaction costs
Loading and unloading works
Storage costs
In relation to the financial result The cost of the consumed factors of

production
Costs are allocated to products
Operating expenses
Lost profits
Fig. 10. Classification of logistics costs

Source: authors own elaboration.
162
While scientific interest is the system for assessing the impact of logistics costs on the
overall financial performance of Ukrainian industrial enterprises. To accomplish the task,
was used the regressioncorrelation analysis. For analysis were used data of financial state-
ments of the leading Ukrainian machine-building enterprises. From the form of the bal-
ance sheet were analysed articles like “supplies”, “WIP”, “finished goods” and “goods” that
can be correlated with logistics costs inventory management. Of the Report on financial
results there were analyzed the article “costs of distribution” and “administrative costs”,
which also presents logistic costs. As can be seen from table 1, the income from the sale of
all analyzed companies is greatly influenced by the level of inventories and distribution
costs, as evidenced by high values of correlation coefficient in all engineering enterprises,
which were analyzed. For the two articles logistics costs, the values of correlation coeffi-
cients range from 0.62 to 0.91.
Which indicates the high dependence of machinebuilding enterprises of income
from these two articles logistics costs. Administrative costs, the average effect on in-
come of engineering companies. The highest value of the correlation coefficient for this
expenditure observed in the enterprise SOE “Pervomayskdizelmash” (0.82) and PJSC
“Dníprovagonmash” (0.72), which indicates a high degree of impact of administrative
costs on the income of the two companies. PJSC “Umanfermmash” and PJSC “Azovza-
galmash” observed average values the impact of administrative costs on the income of
these companies.
This type of logistics costs as “finished goods” quite high correlation coefficient ob-
served in PJSC “Dneprovagonmash” (0.57) and PJSC “Kryukívskiy railway coach manufac-
turing plant” (0.64). Low values of correlation coefficient for the “finished products” in all
other engineering companies indicates a reduction in logistics costs by reducing finished
goods inventory in the warehouses. This is a progressive practice of business, characteristic
of B2B markets, when the number of products fully meets the demand, reflecting a reduc-
tion of cost of storing finished products in warehouse.
The calculations allow us to conclude that the General trend for all engineering
companies is a high impact on the revenues of these enterprises such articles logistics
costs as inventories, cost of sales and administrative expenses. Such articles logistics
costs as “construction in progress” and “finished goods” have low values of correlation
coefficient, which indicates the absence of their influence on the revenues of engine-
ering companies. Calculations of correlation coefficients logistics costs showed that the
degree of influence of logistics costs in revenues the enterprise, you can perform only
on indicators, which are reflected in the financial statements. Thus, there is no way to
track the level of logistics costs and the extent of their influence over business proces-
ses. You can only make a general conclusion on the enterprise and to identify a general
trend for the industry. In the context of globalization, when big companies shape their
distribution channels in international markets, the need arises of accounting for and
calculation of efficiency of logistics costs on logistics operations, which will form the
optimal logistics chain.
163
Conclusions
In the study posed problems of accounting logistical costs in the financial statements
of industrial enterprises. Currently in the financial statements of industrial enterprises
logistics costs are usually aggregated accounting articles managerial accounting, which
makes it impossible including expenses that arise as a result of the formation of global lo-
gistics chains. The consequence of this approach is the need to revise the traditional meth-
ods of accounting logistical costs adopted in the accounting and management accounting.
Proposed allocation in the financial statements of the industrial enterprises of the two
main items of logistics costs: transportation costs and costs of inventory management.
The proposed approach requires also a revision of the generally accepted classification of
logistics costs, which should be improved with additions of two more signs. First, depend-
ing on logistics operations, the cost can be divided into: shipping costs; transaction costs;
costs of loading, unloading; storage costs. Secondly, in relation to financial performance,
logistic costs should be divided into: the cost of consumption of production factors; ex-
penditure on clean production; operating expenses; costs associated with loss of profits.
It is assumed that all the proposed types of logistics costs should be taken into account
within each logistic chain. This allows you to calculate the efficiency of individual logistics
chains that globalization is the most pressing problem.
References:
Lewis, R.L. (1993). Activity-Based Costing for Marketing and Manufacturing. Westport, CT:
Quorum Books.
O`Guin, M.C. (1991). The Complete Guide to Activity-Based Costing. Englewood Cliffs, NJ:
Prentice-Hall.
Kaplan, R.S. & Johnson, H.T. (1987). Relevance Lost: The Rise and Fall of Management Accounting.
Boston, MA: Harvard Business School Press.
Oklander, M.А. (2004). Logistics system of the enterprise. Odessa, Ukraine: Astroprint.
Kricavsky, E.V., Dovba, M.O., Kostiuk, O.S. & Shevtsev, L.Yu. (2004). The theory of optimiza-
tion of logistics costs. Bulletin of the Sumy State University. Series Economics, 5(64), 142–154.
Krikavsky, Ye.V., Chukhraj, N.I. & Chornopyska, N.V. (2006). Logistics: Compendium and
Workshop: Teach. Manual. Kyiv, Ukraine: Condor.
Andrukhova A.A. & Yakimov I.A. (2010, April). Organization of Accounting for Logistics
Costs. Science and Economics, 4(20), 70–73.
Types and sources of logistics costs (2016, August 16). (n.d.). Retrieved from http: http://www.
xcomp.biz/3-1-vidy-i-istochniki-vozniknoveniya-logisticheskix-izderzhek.html
State Statistics Service of Ukraine. (November 11, 2016). (n.d.). Retrieved from http://www.
ukrstat.gov.ua
Features of cost accounting in logistics. (November11, 2016). (n.d.). Retrieved from http: http://
studopedia.com.ua/ 1_22346_osoblivosti-obliku-vitrat-v-logistitsi.html
Financial reporting of machine-building enterprises. (November 11, 2016). Retrieved from
http://www.smida.gov.ua
164
Chapter 12.
IMPROVING THE MANAGEMENT OF
INDUSTRIAL DEVELOPMENT IN THE
CONTEXT OF THE POLICY OF NEO-
INDUSTRIALIZATION
Lyudmila Deyneko, Ella Sheludko, Oksana Kyshnіrenko, Iryna Romaniuk,
Nanthakumar Loganathan
Introduction
T he scientific vision of the domestic industry as a key element of the economic sys-
tem that is able to modernize and create a base for industrial growth is based on
a new approach to ensure its diversification and complex proportional development of the
ability to save and restore traditional industrial enterprises that are able to provide quality
improvements and stimulate the development of production systems in accordance with
international requirements and with the prospect of forming the new high-tech and com-
petitive industry sectors. Change in the paradigm of economic development is caused by
transformation processes in Ukraine that began in 2013–2014, and the need to shift from
subsidized state industries to produce competitive products in the global market. Domes-
tic industry is now undergoing indigenous transformational changes against the backdrop
of the extremely dynamic situation in the global industrial sector, where there is a rapid in-
troduction of revolutionary innovations in the organization of production based on mod-
ern information technologies and industrial processes and in technology and commodity
structure of industry using new products, completely new materials and production.
For the recovery of the Ukrainian economy one needs, above all, a strong, updated and
modernized industrial base and therefore it is urgent to create a powerful industrial sectors
with a high degree of competitive enterprises (companies) that can operate in different eco-
nomic sectors: manufacturing, distribution, consumption. The task of increasing the industrial
potential of Ukraine and the expansion of production capacity of markets requires an assess-
ment of readiness of industrial complex to neo-industrial changes in the detailed breakdown
(by industry) and evaluate its performance. In the context of globalization there is a need
to provide growth of competitiveness of production sectors and certain types of economic
activity, which is now and may become in the future competitive in world markets, the effec-
tive demonstration of technological platforms, the availability of high technology innovation
companies and industries, the ability to overcome the threat of de-industrialization countries.
In industrial policy, oriented on the neo-industrial transformation, there is a prefer-
ence towards soft, horizontal adjustment methods where high priority is given to the de-
velopment of public-private partnerships in order to obtain a synergy effect in the mod-
ernization of innovative renewal and diversification of domestic production structures.
The key issues of industrial policy will not be the development of certain areas or prioriti-
zation of certain technologies (Reinert, 2011, р. 15). The key issue in the implementation of
industrial policy in neo-industrial transformations ‒ and what methods and mechanisms
can be employed to implement them.
An important feature of industrialization is also that transformation emphasis is not
only on strengthening the internal market or production, but also on how to develop clo-
ser links with international markets and use the opportunities opened by trade, foreign
investment and involvement in global value chains.
Neo-industrial transformation can be defined as a model of industrialization, whose
main task is the reconstruction of the industrial base and the introduction of fundamen-
tal innovations. The ultimate goal of neo-industrial transformation is not just industrial
growth, it is focused on sustainable growth, which implies in particular the growth of
employment and income, quality of life, compliance with environmental requirements,
environmental protection and resource efficiency.
1. Assessment of Readiness of industrial complex of Ukraine to neo-in-

dustrial transformation
The current state of the industry can be described as a crisis, manifested in the rapid
fall of industrial production, deindustrialization, archaism industrial structure, reducing
its competitiveness.
In recent years there is a deepening crisis in the industry, which is manifested in the
rapid fall of industrial production. In particular, the decline is from 2012 and amounted
to -0.5% in 2012 (compared to the previous period) -4.3% ‒ in 2013, -10.7% ‒ in 2014 and -13
0% ‒ in 2015 (Table 1) (Shovkun, 2015). Even more rapid is the decline of production in the
processing industry, which has a key role in the modernization of the whole economy ‒ by
2% in 2012, by 7.1 ‒ in 2013, by 10.1 ‒ in 2014, by 12.6% in 2015.
Table 1. Selected indicators of industry in Ukraine in 2011–2015

Indicator 2011 2014 2015
Industrial production index (percent to the corresponding period
108.0 89.9 87.0
of the previous year)
Incl. products manufacturing industry 109.7 90.7 87.4
The share of industry in GDP, percent 22.9 19.4 20.1
Incl. manufacturing industry 12.8 11.4 12.1
Employment, thsd 3352.7 2898,2 2573.9
Exports, $ bln 61.5 44.0 29.3
Index of capital investment (percent to the corresponding period
141.6 74.3 80.1
of the previous year)
Note: GDP is gross domestic product.
Source: compiled from data: the State Statistics Service Ukraine – http://www.ukrstat.gov.ua/.
166
Lyudmila Deyneko, Ella Sheludko, Oksana Kyshnіrenko, Iryna Romaniuk, Nanthakumar Loganathan
Chapter 12. IMPROVING THE MANAGEMENT OF INDUSTRIAL DEVELOPMENT IN THE CONTEXT OF THE POLICY OF...
The processes of de-industrialization of the national economy are continuing. The

decline of the industry reduces employment in the sector. The industry now contains 15.6%
of the employed population (compared to 16% in 2014). According to the European Com-
mission, one manufacturing job in the EU creates 0.5 to 2 jobs in other sectors (Antonen-
ko, & Zakharov, 2015), particularly industry also provides jobs in related sectors, especially
transport and trade. Thus, long turmoils in the industry are the significant factor in the
crisis of all the national economy.
Fig. 1. Structure of sales of industrial activity for the year 2008–2015
Fig. 2. Structure of gross value added of industrial activity for the 2008–2015
Source: given data is for:
‒ for 2008–2009, considering temporarily occupied territory of the Autonomous Republic of Crimea and in Sevastopol;
‒ for 2010–2015, excluding the temporarily occupied territory of the Autonomous Republic of Crimea and in Sevastopol;
‒ for 2014–2015 ‒ also excluding the zone of the antiterrorist operation.
Layoffs in industries during 2011–2015 accordingly reflected the decrease of gross do-
mestic product. The share of industry in GDP reduced (from 22.9% in 2011 to 20.1% in 2015).
The same occurs in the processing industry’s share in GDP fell from 12.8% in 2011 to 12.1%
in 2015. Analysis of the industry by main economic activities shows that mining and pro-
cessing industries together form about 80% of industrial production and supply of elec-
167
tricity, gas and water is 20.1% (2015) (Fig. 1). In the structure of industrial production the
share of the mining industry (is gradually increasing), and the share of processing industry
is reduced (minimum extreme – in 2013 (61.8%). The contribution of the sector of process-
ing industry in gross value added structure that formed the industry, also reduced (Fig. 2).
These changes occurred primarily by reducing the share of industry specializations in
the creation of value added, including metallurgy, chemical, light industry and so on. Nar-
rowing the role of manufacturing industry in creating GDP decline is a sign of economic
and technological backwardness of the economy.
The report of UNIDO “Industrial Development Report 2016 (The Role of Technology
and Innovation in Inclusive and Sustainable Industrial Development)” (2015) experts say
that according to the annual ranking of UNIDO for the Index of Industrial Competitive-
ness (CIP) in 2013 Ukraine occupied 55th place among 144 countries. Compared to 2008
Ukraine lost two positions in the ranking downward, and this happened, in particular,
due to decrease in exports of manufacturing industry products per capita, reduction in
the share of processing industry exports in merchandise exports and the share of medium
and high-tech products in exports processing industry (Table 2).
Table 2. Components of the index of industrial competitiveness of Ukraine in 2008 and 2013
Indicators of Ukraine Competitiveness Index 2008 2013
place value place value
MVA per capita (2005 $) 86 375.0 86 358.7
Manufactured exports per capita (current $) 59 1233.9 64 1088.6
Medium- and high-tech MVA share in total
42 33.9 42 33.9
manufacturing, percent
Share of MVA in GDP, percent 33 17.0 34 17.0
Medium- and high-tech manufactured exports share in
46 45.0 53 42.3
total manufactured exports, percent
Manufactured exports share in total exports, percent 43 85.6 56 77.8
Impact of a country on world MVA, percent - 0.00 53 0.18
Impact of a country on world manufactures trade, percent - 0.01 40 0.39
Note: MVA is manufacturing value added; GDP is gross domestic product.
Source: compiled according to the UNIDO Industrial Development Report 2016 The Role of Technology and Innovation in Inclusive
and Sustainable Industrial Development, p.227.
The most dangerous for Ukraine is not even the low competitiveness of products,
companies, industries and the national economy as a whole, but the possibility of a sys-
tematic lag behind leading countries because of the incompatibility of technologies, low
capacity of the economy to investment and innovation. The collapse of exports of manu-
factured goods negatively affects the financial and monetary stability of the whole econo-
my, but it is the basis of the import of equipment and technologies that are intended for
modernization of industry innovation.
This situation forms the uncontested need for reform of “traditional” industries in
Ukraine and ensure the development of high-tech industries. Global experience shows
168
that the volume of sales and exports of industrial and consumer goods stimulates eco-
nomic prosperity, demanding more attention to the development of modern production
facilities, investing in the development of high-tech infrastructure and education. Coun-
tries and companies seek to move to a new technological level and improve the economic
well-being. Amid a combination of digital and material aspects of the production, use
of innovative technologies becomes more important to improve competitiveness at both
companies and states in general. High-tech industries actually form the global manufac-
turing landscape in most advanced economies and, as it turns out, may offer a clear path
to achieving or maintaining industrial competitiveness.
The idea of neo-industrialization of Ukraine is to create large export sector in ex-
port terms of industrial policy, which will produce a reliable of foreign currency into
the country; ensure the participation of foreign direct investment in the formation of
various industries (both traditional and new), aircraft and shipbuilding, instrumentation,
agricultural machinery, IT-technology, pharmaceuticals, modern energy efficient building
materials, a strong agricultural sector, modern military-industrial complex. Strategy of
neo-industrial transformation of industrial complex should be based on the postulate that
it is the processing industry that should be the main source of economic growth, providing
significant annual growth in gross value added.
Improvement of industrial development in the context neo-industrial transformation
requires more detailed consideration of characteristics that affect the current development
of industrial production in Ukraine and determine the readiness of the leading sectors to
neo-industrial change. Traditionally, economic studies concentrate on strategic sectors (engi-
neering, steel, etc.). Let’s examine the features of such promising sectors of processing indus-
try in Ukraine with significant potential, particularly wood, chemical and food industries.
2. Status and characteristics of neo-industrial transformation of indu-

stries producing industrial goods
2.1. Processing of wood and manufacturing of wood products
Wood industry is one of the few sectors of the real economy, which shows a gradual
growth, despite the difficult conditions of operation, and its development has a significant
impact on economic growth (Fig. 3).
2949 companies (7.0% industry)
Wood industry – the driver of about 34.5 thousand employees (1.4 % of the number of employees in industry)
economic growth
4% of all innovative enterprises in Ukraine
2.9% of all export
Fig. 3. The contribution of the wood industry to the economic development of the industry
of Ukraine (2014)
169
Threatening environmental factors such as loss of traditional markets; cease of cooper-

ative ties and economic sanctions by Russia; destruction of productive capacity in eastern
Ukraine due to military operations didn’t have a strong destructive effect on wood industry
which shows a gradual increase in sales of 7.4 billion USD in 2010 to 18.5 billion USD in 2015.
By 2015 domestic manufacturers produced sawn or split wood, with thickness of 6
mm – 1.9 million m3, of softwood in Mouldings – 14.1 ths. tons, of hardwood in Mouldings
– 69.1 thousand tons; Plywood – 186 ths. m3, of raw wood panels – 1.3 million m3, Veneers
– 59.1 thousand m3, cut – 53.0 mln. m2, parquet wooden shields – 605 thousand m2, wooden
windows, doors, frames and thresholds – 2.4 million m2.
Today, leading processors and manufacturers of wood products are: Krono-Ukraine
LLC, Kronospan UA LLC, Korosten MDF Manufacture PJSC, SwissPan Limited LLC,
“Kostopil plywood plant” LLC, “Brodivs’ke lisove gospodarstvo” SE.
Thus, in the development of the internal market of wood-date there are following
trends: the development of new types of import-substituting production, including pro-
duction of modern wood tile materials and Wood chemistry products; overcoming of the
shortage of raw materials (particularly for pulp and paper industry); creation of favorable
conditions for European import equipment and technology, which is a prerequisite for
modernization of the sector; reduction of energy intensity by industry to generate energy
from renewable wood sources, the development of biofuels; use of international technical
assistance grant for the implementation of innovative energy-saving projects, access to
donor funds, consulting assistance.
In order to produce competitive products, woodworking enterprises require signif-
icant investment to restore technology processes as well as implementation of modern
management systems etc. The main obstacle for implementation of new technology pro-
cesses and equipment for woodworking enterprises in Ukraine is lack of funding. Own
funds are the main source of investments in the wood processing sector of Ukraine. Their
share in 2014 was 95.4%. Financing of innovative work occurred only twice from the state
budget in the last decade, simultaneously their share was only 0.05% in 2012.
The volume of capital investments of woodworking enterprises was 2.6227 billion USD
in 2015 (State Statistics Service of Ukraine, 2015), their share in overall structure of invest-
ments in the industry remains very low – 3.0% in 2015 (State Statistics Service of Ukraine,
2015). Attraction of foreign investments in the wood processing sector of Ukraine is a
promising but risky direction as the investment climate in the country is unfavorable, and
the risk of investment in economics is significant. The majority of foreign investment in
wood processing is directed to Romania, Belarus and Russia. In Romania, near the border
of Ukraine, a new plant of chipboard company Egger (Austria) was built. Next to this
plant there has been an increase in sawmill production capacity of 1 million m3 of timber
per year by the company “Schwaighofer”, the waste of which will be used as a raw material
for the production of particleboard. Second powerful particleboard plant was built by the
company “Kastamonu” in the Mures County and is also located very close to the border
of Ukraine. Significant investments in construction of particleboard factories in Belarus
and Russia were made by the company “Kronospan” (Switzerland). All of these companies
considered the possibility of investing in Ukraine, but due to big risk, abandoned these
projects in favor of other countries (Sagal, 2014).
Therefore, the primary objective is the restoration of a favorable investment climate. Ef-
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fective tool for this is the introduction of a system of state guarantees, improvement of the
quality of the institutional environment; macroeconomic stability; sustainable reduction
and maintenance of low inflation; implementation of environmental and social standards.
The creation of clusters as an effective form of public-private partnership, which has
already been successfully tested in other countries will contribute to the solution of in-
vestment problem of woodworking industry. Woodworking cluster allows you to combine
the efforts of the wood processing enterprises, regional Executive authorities and local
governments, financial institutions, educational and research institutions to establish
partnerships for relatively expanded reproduction potential of woodworking and raising
funds for investment needs of industries. The cluster creation involves the grant of both
resources and budget. Besides, its implementation will involve all stakeholders: the gov-
ernment, wood processing enterprises, and public organizations. As a result, the cluster
will promote deep processing of timber in the region, will attract new investment in the
industry and increase the competitiveness of local producers (Ukrainian Forester: news,
2013). As a successful example one can mention the activities of the Cluster of wood and
furniture production, created in 2010 as an Association of woodworking and furniture
enterprises that work with wood in Western Ukraine.
The cluster of wood and furniture production is an economic Association, the objec-
tives of which are: expansion of markets for products of member companies and markets
of wood products in General; the introduction of new products, improving technologies
and implementing innovation projects; increase of the competence of workers, greater
access to human capital; cooperation with state agencies.
Important for the modernization of the woodworking sector is the woodworking col-
laboration of producers within a cluster that allows the use of financial and technical inter-
national assistance, as this was a Cluster of wood and furniture production. Association of
producers received the support of the RERAM project from the EU and economic devel-
opment agencies, Knowledge Networks, thereby creating the Council of the forest sector,
which performs the functions of the Advisory body of the state administration and devel-
ops strategic plans for the development of the industry, conducting activities to increase the
efficient use of forest resources, studying the social and environmental aspects of forest sec-
tor development and also gives recommendations and advises stakeholders on the correct-
ness of management decision-making (The cluster of wood and furniture production, 2015).
The main problems of the wood industry are:
⁃⁃ outdated material and technical base and high degree of wear of the existing production
capacity which doesn’t allow production of high quality products;
⁃⁃ technological lag behind the world level is characterized by failure of the innovation activi-
ty of woodworking enterprises;
⁃⁃ the imbalance of the internal market that is characterized by poor demand for round timber;
⁃⁃ lack of facilities for the processing of a variety of forest raw materials;
⁃⁃ high fees for energy, materials and transport rates which create a non-competitive environ-
ment in the domestic market and lead to high cost of production.
The basic needs of the woodworking industry: the establishment of an effective me-
chanism of procurement of wood raw material for the organization of the wood market
and the establishment of clear and understandable rules of realization of wood; the for-
171
mation of a leverage of influence for creating products with considerable added value,
that is, the development of deep wood processing in the country and not exporting it as
raw material to foreign producers; enforcement of transport tariffs, in particular, railway
transportation for domestic transportation in accordance with the transit and the intro-
duction of a moratorium on their improvement; an innovative update material-technical
base with the aim of reducing production costs and bringing the product quality up to
international standards.
One of the painful problems of the sector is staff capacity. Of utmost priority is
the training of human resources and, in particular, of our young people. Migration of
young skilled workers, stagnation vocational education, discrepancy young professional’s
knowledge and skills to manufacturers etc. All this makes the importance of reforming
staff training, both at the level of enterprises, regional and state management.
The incentive mechanisms for woodworking industry:
⁃⁃ the establishment of an equitable partnership relations between forestry and wood industries
on the basis of the formation of a market-oriented mechanism for the procurement of wood
for the purpose of stability in raw material supplies to domestic wood processing enterprises;
⁃⁃ reorientation to production of goods with high added value through the legislative, institu-
tional and economic and financial incentive mechanisms;
⁃⁃ development of ecologically responsible consumption of forest products;
⁃⁃ improvement of the national procedures of establishing the origin of timber in accordance
with international standards;
⁃⁃ introduction of uniform system of electronic accounting of timber and revising trade rules
to facilitate equitable market access for producers;
⁃⁃ promoting the use of wood in construction;
⁃⁃ ensuring of equal, non-discriminatory conditions for the use of wood, using it as raw material;
⁃⁃ the introduction of the dual system of training workers for the wood industry. This implies
greater cooperation of producers and educational institutions and training companies’ pro-
duction programs for its employees.
2.2. The production of main chemical products

The domestic chemical industry has always been regarded as a key industry because
of chemical production in Ukraine was developing quite dynamically and at a rapidly
growing rate, especially in the sectors of nitrogen chemicals and fertilizer production.
Investment attractiveness and financial viability of the domestic chemical industry is
closely connected with the price fluctuation in world markets. The collapse of the value
of energy as a global trend, fall in the domestic economy, increasing turbulence in the
global economy and lower demand in foreign markets are the main factors that redu-
ced the cost of chemical products, which also affected the reduction of efficiency of
chemical plants.
Status and trends of development. The modern profile of a high-tech chemical industry
of Ukraine is formed, first of all, by the enterprises of nitric directions, which are part of
OSTCHEM Group. The Group consolidates four Ukrainian enterprises of chemical indu-
stry (PJSC «Concern Stirol» (Gorlovka) and PJSC “Azot” (Cherkasy), PJSC “Rivneazot”
(Rivne), PrJSC “Severodonetsk Azot Association”), the largest distribution network of
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PrJSC «UkrAgro NPK» and Specialized Seaport Nika-Tera, Ltd. Four industrial giants
of the country for the production of nitrogen fertilizers that produce ammonium nitrate
and UAN, today, through a complex crisis in the country lost a significant part of their
production. In addition to the OSTCHEM Group’s enterprises, the market environment
in the production of fertilizers was created by other powerful domestic producers PJSC
Sumykhimprom, PJSC “Dneprazot”, PJSC Odessa Port Plant and others.
The sectoral structure of the chemical industry is dominated by manufacturing of che-
micals and chemical products, which is represented by 164 large and medium-sized enter-
prises and 1161 small business, which today employ around 80 thousand people (2014). The
specificity of the market of chemical substances and chemical products is characterized by
some peculiarities, because the share of sales volumes of production in large enterprises in
2014 was 61.8% (and in 2011 it was 72%), while the share of these enterprises in the market
structure decreased to 0.8% (from 2.8% in 2013).
Specifics of development. Chemical industry of Ukraine annually can produce more than
5 million tons of ammonia, about 4 million tons of urea, 2.5 million tonnes of ammonium
nitrate, more than 1 million tons of urea-ammonium nitrate, about 200 thousand tons of
ammophos. There is a great demand for complex fertilisers, to the tune of approximately
1 million tons per year, but the domestic industry can supply the domestic market with
these products at no more than 600 thousand tons per year.
The industry has always been export-oriented – export share of chemical products in
total exports of goods amounted to 12–13%, but in the last 5–7 years, it was reduced to 6–8
percent. In the foreign trade Ukraine has undergone significant changes in 2014, which
were characterized by a significant reduction in total export volume by 13.5% (or 8392.4
million USD), including export to CIS countries – by 31.3%. Despite the considerable deva-
luation of the hryvnia that has led to negative foreign trade balance – -468.3 million USD.
The most important factor in decline of exports has become a serious political conflict
with the Russian Federation and the loss of export-oriented industrial enterprises of Don-
bass and Crimea.
The industry is changing for traditional Ukrainian export markets: there has been a
gradual narrowing of the markets of ammonium nitrate through a large number of tariff
and non-tariff barriers in the markets of both developed and underdeveloped countries;
the changing structure of the market of mineral fertilizers due to the reduction of the
nitrogen exports and exports of urea. The supplies of fertilizers, particularly ammonium
nitrate in the domestic market is constrained by the peculiarities of the domestic taxation.
The development of sub-sector is also affected by the increase in rail freight rates and ta-
riffs for freight forwarding services. Therefore, in the situation of economic fluctuations
and market changes on main export products of the Ukrainian chemistry, it should be
noted that an increasingly important role is played by economic, political and technolo-
gical factors in the reproduction of the competitive environment, which will ensure the
effectiveness of macroeconomic policy.
Factors facilitating/deterring the development of the industry:
⁃⁃ the main competitive advantages for the Ukrainian chemical industry today are the geo-
graphical location, the availability of modern chemical plants, transport infrastructure,
developed network of railway lines and ports, cooperation of enterprises, the locality and
compactness of the concentration of production;
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⁃⁃ potential growth of chemical industry of Ukraine is impossible without strong scientific

capabilities. Leading agencies: “Cherkas’kiy Nditehim” SE, “STC Alvigo” LLC, “Himtehno-
logiya” LLC, “Vndihimproekt Institut” PJSC, “State Research and Design Institute of Basic
Chemistry “NIOCHIM” have experience of techno-economic studies and scientific infor-
mation activities in the field of applied chemistry and chemical technology;
⁃⁃ the main risks lie in the political and financial instability in the country, the growth of
administrative pressure on the industry, the curtailment of production at the marginal and
adjacent territories.
For several years there was a decline in the production of chemicals and products: if in
2011 the index of production amounted to 128.0%, in 2012 – to 96%, 2013 – to 83.1%, in 2014
– to 85.8%. In a number of key products of the chemical industry, domestic producers lose
competitiveness even in the domestic market. The main issue that explains the backward-
ness of the chemical industry, can be considered the following: import dependence of
the country on the whole range of complex fertilizers and the lack of competitiveness for
these types of products; adverse pricing environment on the global and domestic market
of raw materials, intermediates and final products; high prices for raw materials, energy
and growth of railway tariffs for cargo transportation; high capital intensity and the cost
of maintenance of fixed assets, a long payback period of the investment; low availability of
financial resources and high tax burden on the enterprise sector; insufficient development
of system of standards and quality control of chemical products; insufficient development
of human resources, technological potential of the chemical industry; the increased com-
petition for markets, for sources of raw materials; changes in conditions of production
and relations of production.
The needs of the industry. There is an urgent need for the implementation of enterprise
industry investment and innovative projects directed on modernization of the chemical
complex with the target material energy saving and modernization with the aim of saving
energy and reducing consumption of expensive raw materials and reconstruction of exi-
sting facilities, establishment of production of new products with high added value based
on deeper processing of domestic raw materials of natural origin and industrial chemicals,
providing chemical products to the domestic market and improvement of inter-sectoral
cooperation, development of import substitution in the industry, harmonization of natio-
nal database of standards with international standards.
In terms of the Association Agreement with the EU, it becomes important to im-
plement a complex of organizational, technical, financial and economic measures for the
further development of enterprises and provide chemical products to the domestic mar-
ket; to optimize domestic raw material base due to the growth of import dependence on
certain types of raw materials, minerals, gas, etc.; to incur legislative regulation of proble-
matic issues regarding the establishment of preferential conditions to attract investment
of financial resources and domestic support. Priority is given to attracting investment for
the modernization of the chemical industry.
Mechanisms of influence and priorities of neo-industrial development. Given the need for re-
vitalization of the domestic market of chemical products, priority should be given to pro-
jects for expanding existing production capacities and modernizing domestic production
on the basis of deep processing of raw materials – domestic chemical products, nitrogen
chemicals, organic destinations, titanium products, including:
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⁃⁃ introduction of measures for the revival of our own raw materials base, in particular, con-
tribution to the development of primary resources in the Lviv and Ivano-Frankivsk regions
(reserves of potash ore to 6.8 billion tons), the resumption of potash in the amount of 300
thousand tons/year (with the prospect of increasing production to 1.0–1.3 million tons/year)
at “Polimineral”, Stebnic’ke Derzhavne Girnicho-himichne Pidpriiemstvo, PJSC; develop-
ment of Kropyvensky deposit of phosphorus-titanium ore;
⁃⁃ organization of production of new products instead of imported ones by deep processing
of raw materials and products, which can be used to produce marketable products with a
higher added value. Implementation of projects on modernization of production of capro-
lactam, adipic acid, ammonium nitrate, urea (domestic projects (more than 30) for 10 years
was tested on the plants of Russia, Belarus, Bulgaria, Lithuania, China, Uzbekistan, etc.);
construction of plants for production of soda ash as raw material for the glass industry
(based on raw material resources cities Kalush, Slovyansk);
⁃⁃ increase of product competitiveness in domestic and foreign markets through the modern-
ization of existing businesses, renovation, infrastructure under the new economic model
that Ukraine will provide economic growth and will lay the background for future struc-
tural changes of material production in the country. In particular, the implementation of
projects on modernization and reconstruction of production of some mineral fertilizers
(PJSC “Sumykhimprom”); the construction of plant for production of sulfuric acid recon-
struction of equipment for the production of phosphate fertilizers (PrJSC Dniprovs’kiy
Zavod Mineral’nih Dobriv); the construction of new units for the synthesis of ammonia and
production of lime-ammonium nitrate (PJSC “Rivneazot”); modernization and reconstruc-
tion of plants for the production of ammonia and urea, UAN, caprolactam, reconcentrado
nitric acid (PJSC “Azot”);
⁃⁃ creation appropriate conditions for the stable development of production of mineral fertil-
izers and the needs of the agricultural sector of Ukraine in agrochemicals and plant protec-
tion, the necessary assistance in the harmonization of the draft law of Ukraine “On stimu-
lation of development of industry producing mineral fertilizers, plant protection products
and other agrochemicals for agriculture”;
⁃⁃ increase of capacity for the production of titanium dioxide of improved grades at PJSC
“Sumykhimprom”, for which the company requires the construction of 1 km of additional
operation space. Modernization of production will allow the company to produce 3600–
3800 tones of brand assortment of titanium dioxide of improved quality.
The priority directions of import substitution can be plants that produce high-tech
science-intensive products, in particular, the development and application of new com-
plex fertilizers of prolonged effect and enriched with vital micronutrients, complex fertil-
izer with set properties in advance.
The scenario of modernization and innovative development in production of basic
chemistry involves the encouragement of diversification of production and improving
the competitiveness of the chemical industry. The implementation of this direction will
contribute to the development of the chemical industry, which must include measures
to attract investment. One way of attracting investment is the inclusion of plans for the
modernization of chemical production in the Strategy of modernization of economy of
Ukraine with the prospect of using the opportunities of the European programs (Europe-
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an technology platform, Horizon 2020, NoGAP), aimed at the creation and transferring of
scientific achievements of the businesses. In particular, the EU launched the project grant
agreement NoGAР to improve cooperation in the transfer of licenses, joint ventures,
trade transactions, and gain access to international finance. The idea of the project is
that those who require technology, refer to the coordinator of the project applications to
receive them, and those who are technology providers (mostly people from Germany and
other EU countries) send the message to the coordinator of the proposal on the transfer of
technology. European technology platform “Steadfast chemistry” forum, which brings to-
gether industry, science, public authorities and a range of other interested organizations.
The largest framework program of the European Commission Horizon 2020 (designed
for 2014–2020) brings together all existing EU programs for funding research and innova-
tion and enables the Ukrainian scientific-research organizations to take advantage of their
benefits and to obtain grants offered by the European research Council.
2.3. Manufacturing of paper and paper products

The manufacturing of paper and paper products involved 936 enterprises employing
30.4 thousand employees. In 2015, the production volume of paper and paperboard de-
creased by 17% and amounted to 812 thousand tons, with 50% of domestic production that
was exported. Note that the annual consumption of paper and paperboard in Ukraine
totaled 1.1 mln tons and decreased by approximately 27%. This decline is associated with a
reduction in packaging for reducing the volume of sales of the food industry. Consequent-
ly, the imports amounted to nearly 1 million tons.
Domestic companies primarily produce packing types of paper and cardboard, gofro-
karton, products for sanitary-hygiene purposes (toilet paper, towels, napkins), that is all
products that can be produced with recycling. However, there are companies that produce
paper with imported pulp. In Ukraine for more than 10 years there is no production of cel-
lulose. The entire amount of cellulose necessary for the production of white and newsprint
is imported from Baltic countries, Belarus, Poland and the like. Even if the raw materials
are produced in Ukraine, the cellulose is still imported. Note that domestic manufacturers
only produce 15 thousand tons of offset paper in rolls with the needs of 80 thousand tons.
Today the leading producers of paper and paperboard are: PrJSC “Kyiv cardboard and paper
mill”, JSC “Rubezhnoye cardboard and package mill”, “Mondi Packaging Bags Ukraine” LLC,
“Tetra Pak Ukraine” DE, “Tripolskij Package Mill” LLC, “Zhytomyr Cardboard Factory” LLC.
The main problems in the pulp and paper industry:
⁃⁃ lack of supply to the enterprises of primary fiber Ukrainian origin, forcing most companies
to import cellulosic raw material;
⁃⁃ low level (50%) collection of secondary raw materials (waste paper) for the production of
cheaper paper;
⁃⁃ rise in prices for the purchase of waste paper abroad, with the result that companies lose
significant funds for the purchase of raw materials instead of using them for modernization
of production;
⁃⁃ lack of reliable and regular suppliers of raw materials – waste paper from abroad;
⁃⁃ moral and physical depreciation of equipment that is used for manufacturing of products,
and as a result there is a delay in its release;
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⁃⁃ high energy – intensity of technological process of manufacturing of paper;

⁃⁃ high level of competition in the industry;
⁃⁃ strict fiscal policy of the state;
⁃⁃ insufficient quality of domestic pulp and paper products.
The basic needs of the pulp and paper industry: improving the technical level of enterprises
through the implementation of modernization and reconstruction of installed capacity in the
import of technological equipment not produced in Ukraine, use of energy saving technologies,
scientific-technical research and introduction of their results in the production of domestic
industrial enterprises and introduction of system of complex processing of raw materials.
Mechanisms to stimulate the development of the pulp and paper industry:
⁃⁃ stimulate innovative development by introducing technological and product innovations
that will provide paper products with completely new features.
⁃⁃ development of the market of secondary raw materials (waste paper) which is based on the
domestic production of paper and paperboard and share of which in the composition of the
cellulose exceeds 80%;
⁃⁃ creation of conditions for the opening of the pulp production based on the use of wood as
raw material in combination with paper production and pulp production using one-year
plants that will help in solving the issue with meeting the needs of the pulp and paper in-
dustry of primary fibrous raw materials such as cellulose and wood mass.
2.4. Manufacturing of pesticides and other agrochemical products

Ukraine is one of the largest importers of pesticides in Eastern Europe. In 2005–2014, the
gross import of plant protection products (PPP) in Ukraine is steadily growing. The annual
growth rate of Ukrainian market of plant protection products in 2009–2014 was 8.5% on
average, which is above the world average by 2–4%. The total volume of pesticide imports is
almost $ 1 billion. In United States only in the last five years, the market has doubled and the
2014 import plant protection products reached 1.01 billion USD (in 2015 – 0.7 billion USD).
Peculiarities of development. The share of domestic producers on the market of plant
protection products – less than 10% of its volume (2015). Own production of plant protec-
tion products in Ukraine is concentrated in the enterprises „Fabryka agrohimikativ” LLC
(Cherkasy), “Research and Production Enterprise “Zarya” Ltd (Rubizhne, Lugansk region),
Ukrainian „daughter“ of „Alfa Chemgroup“ LLC (Kyiv). In Ukraine, the production of crop
protection products is generic. The main enterprises on production of PPP “Fabryka agro-
himikativ” LLC and „RPE Zarya“ (in the past – Rubizhne State Chemical Plant “Zaria”) is
mainly engaged in formulation of pesticides from Chinese raw materials. In 2014 ”Zavod
Ніmіchnih Reaktivіv ”Donetsk-Reaktiv” LLC was evacuated from the zone of deployment
of active hostilities to Cherkassy, which is settling on the former production sites of PJSC
„Cherkasy Khimvolokno”. To start a full cycle of production of plant protection products
on the renewed facilities, the owners of the enterprises plan to invest about EUR 1.5 mil-
lion, involving financing from its partners – the German company KirschPharma. Also
possesses a certain investment attractiveness Cherkasy state plant of chemical reagents.
Problems of development of the industry. There is a high dependence on imports of pesti-
cides and other agrochemical products, and raw materials for their production. Annually
Ukraine spends 0.7–1.0 billion USD on the purchase of imported pesticides.
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The introduction of a surcharge (5%) on the import of pesticides has substantially

raised the price of plant protection products on the Ukrainian market.
There is a high level of counterfeit goods on the Ukrainian market and also cheap
Chinese products, mainly due to the fact that Ukraine did not restrict Chinese imports
of pesticides and they come on the market under previously concluded loan agreements.
It is a very acute problem of accumulation of agrochemical hazardous waste and its
disposal. With 2.7 thousand storages for obsolete pesticides in the country 48% are in poor
condition, 47% satisfactory and only 5% in good condition.
Mechanisms of influence on the functioning of the industry:
⁃⁃ with the aim of establishing production of chemical means of plant protection on the basis
of industrial complex measures need to be carried out for development of own production
of crop protection products in Ukraine and improving the efficiency of existing plants,
in particular, the project for the production of plant protection in the capacity of ”Zavod
Ніmіchnih Reaktivіv ”Donetsk-Reaktiv” having the necessary infrastructure, production
base and skilled personnel; new plants, particularly in Dnipropetrovsk, Dnipropetrovsk and
Sumy region should be established on the basis of municipal enterprises;
⁃⁃ improvement of the system of education and science to provide the industry with qualified
technical and scientific personnel;
⁃⁃ development of the state program on combating counterfeits on the market of pesticides
and the establishment of a system of effective supervision of this market; the creation of
effective instruments of indirect fight against counterfeiting (in particular, through the
implementation of various programs of financial support for farmers with the assistance of
suppliers of plant protection products);
⁃⁃ application of new tools for improvement of customs policy through the introduction of
such tools as the „risk profiles“ that will improve the situation with the improvement of the
system of inspection of goods.
2.5. Manufacturing of paint products

Today in Ukraine there are four factory paint products with private investment and
one with real foreign investment. Manufacturers of paints (coatings) which can satisfy the
needs of Ukraine in paints and varnishes for domestic and manufacturing purposes, are
now working at half of their capacity (annual production capacity of 250–350 kt of more
than $ 600 million. United States, or 6–7 kg/person (EU – 14 kg/person). The volume of
Ukrainian market of paint products is approaching $ 1 billion USA.
The position of the Ukrainian producers are strong in the production of architectural
paints, however, industrial paints production is underdeveloped. New requirements for su-
stainability, durability, chemical, fire and health safety colors require upgrading facilities,
improving technology and training of highly qualified specialists who can develop recipes
and control the production process and product quality. The lack of technologists has led
to a significant backlog of domestic paint manufacturing industry in some areas from fo-
reign competitors. For example, in the production of modern highly profitable industrial
materials to the enterprises of aerospace, machine–building, car building, shipbuilding,
oil and gas and other industries that have to buy 80% of special coatings abroad. Domestic
capacity in the presence of specialists allow us not only to establish the production of
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industrial coatings and to saturate the domestic market, but also export these products.
Problems of development of the industry. A major problem in the development of
the coatings industry today is the reduction of the role of science in production, the lack
of qualified staff and the unwillingness of сollege and гniversity graduates to work in ma-
nufacturing. Only “Aurora Varnish and Paint Plant”, LTD (Cherkasy) and “Zavod Novih
Tehnologiy”, LLC (Dnipropetrovsk region) have kept research-and-production depart-
ments. The main reason for this situation lies in the lack of communication between uni-
versities and manufacturers. Innovative future of the industry is directly dependent on the
training of skilled specialists who could develop a formula to identify industry needs and
assign tasks to subcontractors to create new products.
Another problem that may result in the loss of competitiveness of Ukrainian paint
and varnish products, is associated with the ambiguous use of the customs authorities
UCGFTA codes to semimanufactured products (substitutes for the pure solvent white
spirit, used for manufacturing varnishes and paints) that are imported. Mixtures of se-
mimanufactured goods are classified (2014) on commodity items 2710 UCGFTA (that is
„White Spirit“ and „Special Gasolines“) are subject to the excise tax. This has already led
to increased cost of production and, as a consequence, the decrease in production of var-
nishes volumes (30–50%) and the import of semimanufactured products.
In addition, the development of the industry is adversely affected by problems with
the payment of dividends, protection of ownership that is associated with the introduc-
tion of the online service for obtaining information from the Unified state register of
legal entities, individuals-entrepreneurs and community groups, while foreign exchange
market regulation significantly weakens the position of domestic producers.
⁃⁃ ensuring the development and implementation of the program of development of paint
industry. World experience in introduction of innovative and investment projects on state
programs suggests that components for the production of products must only be domesti-
cally producted. This will contribute to the economic growth of the region;
⁃⁃ with the aim of improving the investment climate in the industry and the cheapening of
borrowed funds to domestic producers, include in the program of development of paint in-
dustry a mechanism for providing state subsidies for compensation of expenses for payment
of percent on the credits received in credit institutions, for new construction, reconstruc-
tion and technical re-equipment of existing enterprises, as well as for refinancing previously
obtained loans for investment projects;
⁃⁃ promoting the localization of production of high-tech products on the territory of Ukraine
(for example, in 2013 the construction of a modern paint factory in the village Hlebodar-
skoe (Belyaevsky district of Odessa region) was completed, on the draft of international
company producing coating materials, EskaroGroup AB (Sweden). The plant meets all the
requirements of the concept of „ecological purity“, which involves using the most modern
technologies for the production of waterborne materials that are safe for the environment,
and the use of relevant raw materials);
⁃⁃ development of new forms of business cooperation with relevant universities, who are able
not only to develop technical specifications for new products, but to produce materials in
the required quantities. In particular, the SE Yuzhnoye, after breaking ties with Russian
179
suppliers and acutely feeling the need for a special paint materials, developed technical spe-
cifications and in conjunction with the Ukrainian State University of Chemical Technology
have produced enamel for exterior surface of missiles with reflecting optical properties;
⁃⁃ with the aim of bringing University programs to the needs of the market, offer the Ministry
of education of Ukraine to make changes in the system of education in order to attract
associations and employers to develop new standards of education, to allow universities to
create curricula tailored to the needs of the business.
2.6. Production of artificial and synthetic fibers

An alternative and complement to the natural fibers in textile production are fibers
with properties that can be changed in wide limits, for use both in pure form and in mixtu-
res. Historically, Ukraine had its own base for production of chemical fibers, which was esta-
blished from 1960 to 1970. Until recently a sub-branch united 5 specialized enterprises in the
cities of Chernihiv, Kyiv, Cherkasy, Zhytomyr. Now none of these companies is operating.
Since 1996 Sokal fiber plant stopped its production (rayon) and in 2000-s JSC „Kyiv Him-
volokno“ (2006), PJSC „Cherkasy Himvolokno“ (2008), JSC „Chernihiv Himvolokno“ (2009)
stopped working. Production was carried out at JSC „Zhitomirskiy Zavod Hіmіchnogo
Volokna” (from 1998 to 2008 it worked with interruptions, from 2008 to 2012 did not work
after large-scale fire). Today there are more than twenty small business entities that produce
products worth about 1 billion UAH. On the territory of the liquidated plant of PJSC „Cher-
nihiv Himvolokno“ there are two companies: „UkrCord” LLC and “Monofiloment“ LLC.
The newly created company „UkrCord“ uses the latest equipment from „Chernihiv Him-
volokno“, but the owner of the company replaced the technological scheme of production,
in particular, he refused to process the production of thread and buys it in China or Europe.
Peculiarities of development. Today the industry has developed an extremely difficult po-
sition, associated with an almost complete absence of material-technical base of production.
The lack of domestic raw materials, the use of obsolete technologies of production of syn-
thetic fibers and yarns, decrease in demand of textile and other industries in these products,
financial instability of the enterprises, loss of related industries in connection with the eco-
nomic crisis have led to the closure of the leading enterprises, due to which the production
of chemical fibres and yarns in 1991–2014 decreased by more than 16 times and amounted in
2013 to 12.52 thousand tons, 2014 – to 10.87 thousand tons, in 2015 – 10.77 thousand tons (for
reference: in 1990 – 179.2 thousand tons). The share of synthetic fibers in 2010 was 52%, in
2012 – 48%, data on the distribution of total production by types in 2014 I missing.
Problems of the industry. The few domestic manufacturers of synthetic fibers are small
and medium enterprises and can not provide the whole range of chemical fibers, which is
necessary to tekstile, motor, buildings and the defence industry. It is vital to restore full
production of artificial and synthetic fibers, especially of new products.
In this regard, important is the loss of technologies of full cycle of production of
artificial fibers, narrowing of the range of products and supply of raw materials. As the
analysis of the statistical data shows, almost all of the production today is a synthetic fila-
ment yarn and synthetic monofilament thread, tape and similar materials textile synthetic
products. A significant part of the textile yarn is exported.
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⁃⁃ creating favorable conditions to open the target investors of the industrial production of
artificial and synthetic fibers that can be renewed on the basis of the production sites of
the former giants of the industry – JSC „Chernihiv Himvolokno“, JSC „Zhitomirskiy Zavod
Hіmіchnogo Volokna” – and transformed into centers of innovation and modern services,
which can become a vehicle for the implementation of economic reforms and growth of
foreign direct investment in the regions;
⁃⁃ implementation of projects on creation of new types of products (chemical fibers „Arma-
lon“ (high strength, high modulus synthetic aradi used for personal body armor, special fi-
re-retardant clothing for firemen and rescuers, high quality structural materials for aircraft
construction and rocket production, automotive industry, shipbuilding) and electrically
conductive fibers, yarns and fabrics of the type „Bikarbolon“ („cloth of invisibility“ is used
as a screen cover for protection from the radiolocation finding of military equipment and
manpower), which are used in the defense industry (technology developed by Ukrainian
scientists and the equipment for their production manufactured by “Stend, Kyivskyj Ek-
sperymentalnyj Mashynobudivnyj Zavod” OJSC;
⁃⁃ implementation of projects on production of carbon fibres and composites on their basis
(used in mechanics, aircraft and shipbuilding, equipment for production was developed at
“Stend, Kyivskyj Eksperymentalnyj Mashynobudivnyj Zavod” OJSC);
⁃⁃ support of development of composite materials and products from them in the framework of
the Program of modernization of the chemical industry, in particular, through the provision of
concessional long-term loans and financial leasing, aimed at creating new high-tech industries.
2.7. Manufacturing of main pharmaceutical products and pharmaceutical drugs

The pharmaceutical industry is an important component of the formation of the hi-
gh-tech potential of Ukraine. The domestic pharmaceuticals industry is developing dy-
namically and is the leader of the European vector of integration in the country as long
as it is focused on production in accordance with European standards of manufacturing,
distribution, laboratory practice, and the like. However, the industry is in need of struc-
tural renovation, modernization, introduction of innovative technologies, improvement
of the regulatory and legislative framework.
Economic activity in the production of pharmaceutical products is focused mainly on
large and medium-sized enterprises. The highest dynamics of growth is shown by large en-
terprises – their share in the market structure in 2014 increased to 2.8% compared to 1.3%
in 2011, while the proportion of employees of large enterprises amounted to 33.8% in 2014.
The share of large enterprises in the volume of sales is increasing. Such trends indicate an
increasing level of concentration of production in large enterprises and create conditions
for the redistribution of the pharmaceutical market among the major domestic players in
the direction of the dominance of large enterprises.
Pharmaceuticals is one of the most promising areas for attracting investment. Taking
into account year 2014, from the point of view of the emergence of acute economic and
political problems in Ukraine, the volume of capital investment in the industry rose by
19.7% compared to the previous one.
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Ukrainian manufacturers produce mainly generic drugs and are unable to compe-
te with international producers in the creation of original products. The leaders of the
Ukrainian pharmaceutical industry are: JSC „Farmak“, pharmaceutical Arterium Corpo-
ration, PrJSC „Pharmaceutical company „Darnitsa“, PJSC SIC „Borshchahivskiy chemical
pharmaceutical plant“ (Borshchahivskiy CPP)”, Public company “Kyiv Vitamin Factory”,
“Pharmaceutical company «Zdorovye»” LLC (Kharkiv), PJSC „Pharmstandard-Biolik“
(Kharkov), „Ukrainian-Belgian InterChem SLC” (Odessa), „Ekofarm“, Zhytomyr Pharma-
ceutical Factory LTD, „Fitofarm“.
Factors promoting the development of the pharmaceutical industry:
⁃⁃ industry remains stable and keeps positive economic growth rate over a long period, but in
2015, the industrial production index stood at 92.4% compared to the previous year;
⁃⁃ a fairly high level of harmonization of the legal and regulatory framework with the relevant
European directives and EU norms;
⁃⁃ pharmaceutical business, as a growing and recession-proof sector, is attractive for invest-
ment. An example of this interest is long-term cooperation of the European Bank for Re-
construction and Development (EBRD) with the pharmaceutical company „Farmak“, which
has attracted more than 600 million euros for projects on modernization of its production
over the last 2–3 years. Since 2016, the EBRD has started cooperation with 5 pharmaceutical
companies in Ukraine;
⁃⁃ the industry has potential for development, which is determined by the existence of a signifi-
cant historical experience of the domestic production of sera and vaccines, the current scien-
tific school of Microbiology and Virology, a solid research base for the production of generics.
Peculiarities of development. In 2012 the Law of Ukraine „On Ukraine‘s accession to the
Convention on the elaboration of a European Pharmacopoeia“ was enacted. According
to this law, Ukraine has received the status of a member of the European Pharmacopoeia
Commission, and, therefore, the European quality standards of drugs became mandatory.
All 115 companies in the pharmaceutical industry has got the GMP (“Good manufacturing
practice”) certificate, which allows them to export the products to many countries of the
world. Since 2011 the implementation of pilot projects on introduction of state regulation of
prices for medicines for the treatment of patients with hypertension and regulation of pri-
ces for insulin is being continued. The formation of competitive market relations is closely
connected with the conduct of the deregulation of the pharmaceutical market, which is the
simplified registration procedure for medicinal products, simplifying licensing procedures,
abolition of licensing imports of active pharmaceutical ingredients (APIs) and the like.
Key trends in the pharmaceutical market of Ukraine in 2013–2015:
⁃⁃ globalization of the pharmaceutical products market, which is evident in such phenomena
(changes in commodity markets (formerly the raw material was purchased in India, China,
and now in Europe and other developed regions); the interest of major pharmaceutical com-
panies in the production of generics through the support of the government and of the state
in relation to the production of biological products, oncological drugs and drugs for the tre-
atment of cardiovascular diseases etc; domestic pharmaceutical companies prefer to do rese-
arch and marketing, however there is a trend to use outsourcing for testing or production);
⁃⁃ technological progress contributes to the fact that the pharmaceutical market of Ukraine is
of interest to investors because of the opportunities to create new components;
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⁃⁃ significant is the impact of the policy of import substitution on the balance of market power
between pharmaceutical companies, when in recent years the share of domestic producers
in the market significantly increased compared to the share of foreign companies (up to 37%
(2015) vs. 28% (2011) in monetary terms). At the same time hard inflation of this period and
the devaluation of the national currency, which create excessive pressure on the industry, lead
to lower consumption of drugs and expensive replacement of packings of medicines with che-
aper ones in the pharmaceutical segment due to the low purchasing power of the population;
⁃⁃ strengthening the actions against smuggling of drugs and the introduction of new rules of
certification (as 18.08.2016 to the „State register of medicines of Ukraine“ of the Ministry
of health included information on 12814 BOS, of which: domestic – 3857, foreign – 8957).
The main innovation of 2013 was the mandatory labeling of drugs according to GMP stan-
dards, which involves passing the mandatory special certification of production capacity
for all producers of medicines. As a result, at the beginning of 2016, the number of domestic
manufacturers in the pharmaceutical market decreased to 115, the ones has who received a
license for production of medicines (compared to 140 in 2010);
⁃⁃ the entry into force of the new import licensing (from 01.12.2013). Among the main require-
ments for importers of pharmaceutical products: importers must introduce detailed ope-
rating procedures within the quality control system, implement risk management systems,
implement laboratory analysis of imported medicines and renewal of contractual relations
with foreign manufacturers and suppliers, quality control and pricing of drugs;
⁃⁃ in 2015 the system of procurement of drugs was modified and transferred to the compe-
tent international organizations, in particular WHO and UNICEF, which improved the
transparency and openness of the state procurement system.
The problem of development. The interest of international investors to the sector is con-
strained due to the instability of the legislative and legal system, especially through frequent
changes in tax and customs law, and the regulation of the Ukrainian pharmaceutical market.
The development of the pharmaceutical industry slowed down due to lack of reforms
of the national health system and the absence of a National strategy of healthcare deve-
lopment in Ukraine.
The industry is export-oriented mainly on the countries of the former Soviet Union.
The main supply destinations are Uzbekistan, Russia, Kazakhstan, Belarus and Moldova.
During the analyzed period the share of exports of pharmaceutical products in total exports
did not exceed 0.4%, while the proportion of imported pharmaceutical products in total
imports is quite significant – about 4%. Effective for lifting the economy of the pharmaceu-
tical industry should be the promotion of production of goods for export to European co-
untries, the main vector of development is the question of access to the European markets.
There is a high dependence of the domestic pharmaceutical companies on imports of
intermediate goods such as substances, AFI, which are the source for the production of
the final product. There are prerequisites for the start of production of the basic substance
which can be produced on an industrial scale, but there is a requirement only for new
technologies and large investments.
There was not a single original drug (new molecule) registered over the last 20 years in
Ukraine. These trends regarding the lack of new own research developments in the phar-
maceutical drugs inhibit the processes of modernization in the industry, and threaten by
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lagging behind the leading countries in the production of high-tech products and increase
of purchases of imported analogues.
The possible strengthening of the state regulation and control in the pharmaceutical
industry in Ukraine may lead to the restriction of profitability of the pharmaceutical
business. Ukrainian pharmaceutical companies again faced problems that were typical
for 2009–2013, namely: the high cost of credit and investment resources necessary for the
implementation of development projects and expansion of production capacities, which
amid increasing competition in the market, leads to a worsening shortage of working ca-
pital funds of pharmaceutical enterprises.
The needs of the industry. For the solution of problems with raising funds to expand
activities of pharmaceutical companies it is important to take the following steps:
⁃⁃ assistance concerning the possibilities of obtaining soft loans for expansion and innovative
development of enterprises (public-private). Now innovation is happening at the expense
of attraction of own funds (reinvestment) in the development of enterprises in all sectors
of economic activity;
⁃⁃ improvement of the tax legislation to reduce tax burden arising from the import into the
customs territory of Ukraine with a modern, innovative, high-tech equipment for creation
of new and modernization of existing capacities of pharmaceutical enterprises, and the
establishment of a system of tax incentives for exporters.
Effective direction of development of innovative activity on the basis of the experi-
ence of most industrialized countries is the development of technology parks initiated as
innovative policy to promote the production of competitive goods. Implementation of
innovative and investment projects of technoparks in the pharmaceutical industry is rep-
resented so far by only one ongoing project, information about which is available on the
website of the State Agency for electronic governance of Ukraine (registered on 18.05.09,
the project of Industrial Park “Development and introduction in production of new im-
port-substituting finished pharmaceutical products” (SSI “Institute for Single Crystals”,
Kharkov, contractor – Farmak JSC). Perspectives and creation of new technoparks with
pharmaceutical direction in Ukraine are closely connected with improvement of the leg-
islation on the issue of financial support, targeted subsidies of the state and opportunities
for the provision of technical assistance to encourage the development and production of
innovative drugs and creation of conditions for localization of pharmaceutical production
in order to be embedded in the global industrial chain.
In the context of the implementation of conditions to promote the innovative develop-
ment through the provision of technical assistance from the EU, it is necessary to create con-
ditions for implementation of modern methods and technologies economically feasible for
processing large volumes of data with the purpose of obtaining information, which not only
affects the development of the pharmaceutical business and increases its profitability, but
also deepens the scientific and innovative component of applied pharmaceutical research.
There is also the issue of improving research and production potential of the industry
for the development of venture projects in pharmacology. Foreign investors have noted
the presence of skilled human capital capacity in Ukraine, the relative unemployment on
the market, and the availability of government programs to support business in the phar-
maceutical field. Also taken into consideration that the Ukrainian production facilities
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have significant potential to increase where possible to produce a wide range of pharma-
ceutical products using the latest international recipes. At the same time, improvements
require qualitative indicators of medicines, production portfolios and knowledge of pro-
fessionals working in the industry. To restore the growth of the pharmaceutical sector,
state investments in education, training and retraining become an important area.
The mechanisms of influence on neo-industrial restructuring of the pharmaceutical industry.
Companies in the pharmaceutical sector that focus on the implementation of scienti-
fic-research and experimental-design developments and the development of high-tech
export-oriented products should:
⁃⁃ ensure the development of innovative pharmaceuticals with the focus on the domestic mar-
ket. It is necessary to increase R&D expenditure to 10% of the turnover of manufacturers
of pharmaceutical products; to stimulate industrial growth in the domestic pharmaceutical
market by providing financial incentives to pharmacists who have generic drugs. In particu-
lar, the implementation of innovative measures for the economical use of energy resources
and improving the quality of products is provided on the ELFA Pharmaceutical factory and
Biovetfarm PJSC; the development of new types of products at Liktravy, PrJSC;
⁃⁃ through amendments to the Law of Ukraine “On medicines” (regarding the transparency of
production and safety of medicines) No. 1199 dated 02.12.2014, and the adoption of a new
edition of the Program of protection of domestic producers, develop mechanisms and ways
of integration of the domestic pharmaceutical industry in the global industrial chain of
production (in terms of stimulating the creation of technology parks for the development
and production of innovative medicines; creation of conditions for localization of produc-
tion and search of possibilities of construction in Ukraine of a large foreign pharmaceutical
companies factories with full (complete) cycle for the production of analogues of imported
drugs or increasing their capacity in existing plants). In particular, the construction by
Company “Biopharma” of new modern SPC “Biopharma” (2016) has become an example of
fruitful cooperation with foreign companies. This is the first biopharmaceutical manufac-
turing plant in the country built from scratch in recent years in Ukraine. Investors are the
American company Horizon Capital and the Dutch development Bank FMO (for 1.3 years
it has invested more than 40 million USD). The plant was designed by Linde Engineering
(Germany), an international engineering company with extensive experience in the phar-
maceutical industry, and meets current regulatory requirements and the requirements of
GMP (Good Manufacturing Practice);
⁃⁃ ensure the development of domestic production of the API. The solution to this prob-
lem can be implemented in the SME, and in this entrepreneurship sector opportunities
are created in two segments: manufacturing of the API for the local market (through the
attraction of foreign technology and the establishment of production on the territory of
Ukraine) and the production of APIs for major pharmaceutical companies (manufacturing
of chemicals, which are used by large multinational companies);
⁃⁃ stimulate the creation of new competitive dynamic of clusters and industrial parks with
the development and production of innovative drugs (in particular, such as the investment
project for the creation of a new production of active pharmaceutical ingredients in the
Industrial Park “Svema” (manufacturer – Farmak JSC). Positive experience of European
cluster models of regional economic development in the sphere of pharmaceutics and bio-
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technology is the Scandinavian cluster, which brings together four regions (Turku, Finland;
Oslo, Norway; Gothenburg, Sweden; Copenhagen, Denmark). The cluster implemented a
number of promising research projects aimed at solving problems in the field of treatment
of cardiovascular diseases, Oncology, as well as the creation of biomaterials and healthy
technologies. The essence of this project lies in the significant public and governmental
financial support programs of the cluster partially on national and partially on regional
levels; the implementation of cluster programmes and regional strategies that involve bud-
get allocations and targeted grants, benefits and other preferences; help to priority cluster
structures through the implementation of the strategy on principles state private partner-
ships; the establishment of the strategic centers of national level and a significant number
of long-term initiatives in support of cluster development; close cooperation between aca-
demia, pharmaceutical companies and authorities that deal with health care;
⁃⁃ facilitate the implementation of the transformation process control in the industry and sup-
port it, as well as the formation of new principles of business administration, approaches
to the development of IT systems and introduction of new tools of interaction. A key seg-
ment for the development of pharmaceuticals in Ukraine should become a research activity
(R&D). The approach to development in the pharmaceutical industry today is the concept,
which is based on the business process from idea to the market launch, and therefore ev-
erything connected with the ideas, trends, new trends, production tests, communication
with suppliers regarding quality and supply, clinical testing, certification and registration
of substances and drugs in government structures and plans to bring the product to market;
⁃⁃ contribute to the training of specialists of laboratory work, familiarize them with the latest
technologies and modern professional equipment, pharmaceuticals, laboratory medicine, ve-
terinary medicine; provide training in master-classes on operating equipment with the possi-
bility of personal testing, obtaining consultations from experts of the industry, introduction
of new techniques and methodologies in pharmaceutical industry, medicine and science;
⁃⁃ assist in the creation of platforms for meetings between entrepreneurs and investors, ven-
ture capital funds and business incubators, with the goal of providing greater opportunities
to the owners of capital on the choice of objects for investment;
⁃⁃ enter certain privileges (a tax value-added (VAT) refunds for exported pharmaceutical pro-
ducts, guarantees and credit protect exporters against the risks of preferential credit terms
to encourage the development and production of high-tech pharmaceutical products, the
provision of incentives for new enterprises for production of medicines, including the im-
port of new high-tech equipment and the like).
2.8. Food production

Food processing industry in Ukraine plays an important role for the economic de-
velopment of the country. It is one of the strategic elements of the national economy, it
ensures the food needs of the domestic food market, promotes the formation of export
potential of the country and increasing of budgetary and currency earnings.
Major challenges related to domestic economic and political developments, and un-
favorable market conditions in key world markets for Ukraine, resulted in revolutionary
changes in trade and economic relations of Ukraine, both geographical and by industry,
in particular, leading the food industry into drivers of the economy. So, in 2015, the food
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products, almost half of which (42%) was food industry, ranked first in domestic exports,
beating the steel industry, which occupied first place for decades, and also went ahead of
the machinery and chemical industry. The share of food industry in the volume of realized
industrial products in 2015 has reached its historical maximum of 22.6%.
At the same time, according to the state statistics service, industrial production in-
dex of food, beverages and tobacco in Ukraine (excluding the temporarily occupied ter-
ritory of Crimea and Sevastopol) in 2015, compared to 2014, made up 88.8%. There was
a reduction in production volumes in most types of food products compared to 2014, in
particular the production of chocolate and food products containing cocoa (21.3%), milk
processed liquid (11.3%), butter (11.4%), non-fermented cottage cheese (9.4%), fat cheese
(4.8%), yoghurt and other fermented or squashing milk and cream (9.4%). By reducing the
production of certain types of excisable goods in 2015 compared to 2014 the production
of malt beer decreased, except for non-alcoholic beer and beer with an alcohol content
of less than 0.5% (by 19.6%), liqueurs and other alcoholic beverages (16.1%) and vodka with
alcohol content of less than 45,4% (13%). In this period there was a decline in production
of oil and fat industry: spreads and blends of fat dropped by 30.9%, margarine and simi-
lar fats by 30.1% and unrefined sunflower oil by 5.7%. Also, production volumes of other
sectors of the food industry reduced, in particular, sausage products, fruit and vegetable
juices, mixtures thereof, natural canned vegetables, flour, sugar, most grains, wheat bread
and bakery products, cookies and sweet waffles, sauces and condiments and mixed spices,
milk products, natural mineral water and soft drinks etc.
In the current economic conditions, the declining trend in production volumes and
export of food products can continue in the future. So, further depreciation of the hryvnia
may lead to an increase in the volume of agricultural exports, and not products with high
processing level. It can also lead to the loss of domestic raw materials for production by
Ukrainian food processing enterprises.
Quite alarming from the standpoint of food security, given the chronic under-con-
sumption by the population of Ukraine (concerning rational norms) of fruits and vegetab-
les, is the situation in the consumer markets of national canned food fruit and berry (57.7%
of the domestic food market). Over the past five years, the domestic manufacturers of
canned fruit lost 10% of the domestic market. The main reason of this is heavy dependence
on supply of raw materials, 30–40% of which is lost through improper storage conditions
in farms and in processing plants, fierce competition with foreign manufacturers, low
technical equipment of production (over 80% of which is obsolete). At the top margin of
food security is the share of domestic products in the markets of pasta, canned and prepa-
red fish products and canned vegetables, processed fruits and vegetables.
However, today, the Ukrainian consumers are provided by 90–98% with domestic
food and meat products, meat smoked, salted and cured meats, milk and dairy products,
products of oil-fat industry, sugar, alcohol and soft drinks, mineral waters.
Factors threatening the internal and external environment for the development of the
domestic food industry in the last few years are: the loss of a significant part of traditional
markets for food products due to the aggravation of problems in political, economic and
trade relations with the Russian Federation, the antiterrorist operation in the Donetsk
and Lugansk regions, the annexation of Crimea by Russia, the unfavorable situation on
the key world markets for Ukraine, fluctuations in global currencies and commodity pri-
187
ces, the instability of the national currency, low competitiveness of Ukrainian food pro-
ducts compared to similar products of EU countries and developed countries.
On the other hand, a significant reduction in the volume of exports of Ukraine’s traditio-
nal markets for food products stimulate domestic food processing enterprises to find and de-
velop new markets, to modernize the production, implement systems of food production in
compliance with international and European requirements of quality and safety of products
and the like. So, for 2014–2016 exports increased and expanded the geography of supply of
food products of enterprises of the dairy industry, processing oilseeds, meat industry, China,
Egypt, Saudi Arabia, Iran, Iraq, Algeria and some countries of Africa and parts of the EU.
The main mechanisms of realization of policy of development of food industry of neo-industrial
type are:
1. Modernization and reconstruction as well as extension of existing facilities and construction of new
production facilities in accordance with the requirements and regulations of European Union regard-
ing the production of safe and quality products. Statistics show that more than 40% of the fixed assets
of the industry have the operation period of 20 years or more, which adversely affects production
efficiency of enterprises. This situation is largely due to the insufficient level of provision of separate
types of facilities for the processing of agricultural products and high (40–55%) level of wear and tear,
minor processing depth, distance of objects of processing industry from sources of supply of agricul-
tural raw materials, lack of production of the majority of technological equipment. Reference: accord-
ing to expert estimates in the context of implementation of the FTA with the EU, modernization of
food-processing enterprises of Ukraine, which could compete with European companies in terms
of quality of products on equal terms, according to expert estimates, requires up to 10 billion USD.
2. Efficient use of resources in the food industry, which involves ensuring the implementation of
energy efficiency measures in food industry (transition to alternative fuels, replacing equip-
ment with more energy-efficient), waste processing, ensuring of deep processing of raw mate-
rials in the manufacturing process and the like.
3. The development of sectoral science and scientific support to the food industry, which is a
huge and strategically important part in terms of tackling the task of overcoming the crisis
phenomena in the industry and achieve sustainable economic growth.
4. Promoting of innovative development of food industry, development of high-tech, innovative, in-
vestment-attractive directions of food processing production that involves the integration of tra-
ditional technologies with modern biotechnologies and nanotechnologies; the introduction of new
technologies of food production not only commercially viable, but also ecological and economical-
ly affordable for the poor, introduction of information technology for computerized management
of closed technological cycles, planning and monitoring of resource use in the food industry.
5. Encouraging the development of promising sectors of the food industry through the intro-
duction of special tax regimes and providing preferential conditions of access to industrial in-
frastructure within industrial parks, regional and industrial clusters, technological platforms
etc that will contribute to the creation in Ukraine of conditions for business development,
competitive conditions in other countries (tax system, preferential terms of land lease, exemp-
tion from paying certain tax payments and the like). World experience shows that this is not
only an effective tool for influencing the development of the industry, but also contributes to
socio-economic development and competitiveness of the region, investment activity, creation
of new jobs, development of modern production and market infrastructure.
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6. Harmonization of Ukrainian standards in conformity with international standards of quality

and safety of food products, introduction of the international systems of food safety manage-
ment that must be confirmed by one of international certificates for management systems food
safety: FSSC 22000, IFS, BRC, GlobalGAP, SQF. It should be noted that in terms of the provi-
sions of Deep and Comprehensive Free Trade Area (DCFTA) between the EU and Ukraine, har-
monization of Ukrainian legislation with EU legislation in the field of safety and quality of food
will play a significant importance for the export of products of the food industry and for the
domestic food market. Law of Ukraine No. 1602–VII “On amendments to some legislative acts of
Ukraine regarding food products”, which entered into force on 20 September 2015, provides for
Ukraine’s gradual transition to the model of European security and food quality, which is built
on the principle “from field to table”, as well as on the procedures which based on principles of
HACCP. The provisions of this Act significantly reduce the number of administrative proce-
dures of state control and abolish the authorization procedures that do not exist in the EU. There
is an establishment of detailed requirements for the procedures of state control of food market
of Ukraine and imported products in accordance with European practice. Since the implemen-
tation of HACCP requires a certain time and resources, the law contains certain provisions that
will enter into force only after 2–5 years from the date of its publication. In particular, on 20
September 2016 the section VII of the Act will enter into force – General hygiene requirements
for handling food products, according to which market operators will be required to provide a
healthy and clean condition of the plants and animals that have an impact on human health. In
addition, a transition period is provided for in paragraph 2 of article 20, article 21 and paragraph
4 of article 64 of the law. These articles come into force on September 20, 2017 – for facilities
engaged in activities with food, which is composed of raw ingredients of animal origin (except
the small capacities); on September 20, 2018 – for facilities engaged in activities with food prod-
ucts, which do not exist the raw ingredients of animal origin (except for the small capacities);
on September 20, 2019 – for small capacities (enterprises employing up to 5 people). Also, on
September 20, 2019 takes effect the first part of article 36 of the Law about selling home made
food products in agri-food markets subject to confirmation of their suitability according to the
results of trials (research) of accredited laboratory, which is located on the agro-food market.
7. The activities of public authorities, which provides information support for businesses and the
public about future developments regarding sanitary and phytosanitary measures, which will
contribute to strengthening the competitive position of domestic food processing enterprises,
reduce negative perception by Ukrainian manufacturers of changes that will have not always
positive effects in relation to the additional costs of producers to improve product quality.
8. The geographical expansion and diversification of exports of food products, increasing export
of food products in the third countries, in particular, China, Egypt and other countries of
Asia and Africa, which have large markets and are interested in long term cooperation. Today
Ukraine exports agri-food products to approximately 190 countries of the world.
9. Development of measures to stimulate demand, particularly in food subsidies, because, as
practice shows, the establishment of maximum prices and trade mark-ups does not solve the
situation, but often exacerbates, worsens conditions for domestic producers, who respond to
them by either curtailment of production or a deterioration of consumer value of products.
Peculiarity of the development of the food industry is a significant dependence of its devel-
opment on the income of the population. The decrease in consumers income does not simply
limit volumes of consumption, but leads to a shift in demand in favor of products with a high
189
content of cheap substitutes of raw materials of animal and vegetable origin, high content of
preservatives, artificial flavors, dyes and other impurities that enter our market mainly with
imports. According to expert estimates, today a significant share of the total sales in the do-
mestic market of industrial food is poor quality, adulterated commodities, whose consumption
may harm the life and health of consumers. For example, according to different estimates 30–
60% of alcoholic beverages and tobacco products sold in Ukraine are illegally manufactured.
10. The elimination of hidden import of industrial food products in the domestic market of Ukraine
through the introduction of special labelling for products made in Ukraine from Ukrainian raw
materials, as it is done, for example, in Sweden, where products are accompanied by the inscrip-
tion “Scan” and the yellow-blue ribbon. As the volume of products produced in Ukraine, the sta-
tistics includes both products produced from domestic raw materials, and that which is only the
final processing, and the information about the origin of the raw material on the label is usually
absent, sausages made from Brazilian meat or milk from Polish powder on the market appear as
a hundred percent domestic product, thus distorting the real picture of the import expansion in
the domestic market of industrial food products and reducing the efficiency of the measures to
support the domestic agricultural sector and development of agro-industrial integration.
11. Account of world tendencies of development of food industry and science. Thus, the main
global trends of food production are: the production of environmentally clean food products;
organic production and fast food; the introduction of new technologies using advances in bio-
technology, nanotechnology, freezing and drying and other modern manufacturing processes;
manufacturing of food products with deep processing, which involves minimal or no waste.
2.9. The printing industry

Main problems of the industry are: lack of supply of printing enterprises with pro-
duction resources, which leads to high dependence on imports; worn-out and outdated
technical and technological equipment of most enterprises jeopardizes further develop-
ment of the industry; lack of quality of polygraphic execution and content of Ukrainian
books; violation of economic and technological relations in the system of production of
printed products; a significant number of imported printed products in the book market;
a high level of movement of labour, which has a systemic nature that weakens the compe-
titiveness of enterprises; imperfect sanitary-hygienic standards in books for children and
young people; the lack of book distribution in Ukraine, the lack of demand for domestic
products; insufficient level of professionalism of personnel.
For Ukraine, which has strategic potential for the development of the printing indu-
stry, reducing the current lag in the effectiveness of functioning largely depends on the
actions of the effective tools of state management.
Needs of the printing industry are: the rising demand for digital technology and, accor-
dingly, the transition from printed material to digital media, leads to a decrease in demand
for printed products and makes the printing industry diversify its operations towards the
introduction of innovative products; the development of new niches for printing in the
field of electronic communications; the use of digital technologies that not only reduce the
time of the editorial and publishing process, but also qualitatively modify it, enhance the
professional capabilities of specialists; the formation of an effective system of monitoring
production processes and quality management, ensuring continuous monitoring of quality
190
indicators of raw materials and finished products; the demand for printed materials.
Mechanisms of influence on the development of the printing industry:
⁃⁃ elimination of location disparities of enterprises in regions, which leads to deformation of
the industrial structure, reducing the requirements of printed products;
⁃⁃ purchase of publishing and printing products by the government;
⁃⁃ formation of cluster system of interaction between printing companies, which provide
communications with companies and organizations in different industries – information
and publishing centers, suppliers of technological equipment and supplies, corporations of
market infrastructure, state and local governments.
2.10. Furniture industry

The furniture industry is one of the most dynamic sectors of the processing indus-
try. In Ukraine there are more than 1.4 thousand enterprises with about 35.6 thousand
workers, producing more than 12.5 million pieces of furniture for various purposes, which
are supplied to the domestic and foreign markets. By size of enterprises on the market
the industry is dominated by small businesses – they share 91.7% of the total number of
enterprises in the industry. Due to falling demand for furniture through their significant
rise over the last two years Ukraine has seen a reduction in furniture manufacture: by 1.6%
in 2014 and by 12.4% in 2015. Leading furniture manufacturers are “Modern-Expo”, CJSC
“Novyi Styl Ukraina”, “Morgan Fenice” LLC, “Art Prom” LLC, “Mebel Service” LLC.
The main problems of the industry include: insufficient quantity and quality of domestic
parts, which causes the use of imported components; the diversion of significant amounts of
working capital in connection with the necessity of paying duties on imported equipment
and VAT, payment of which occurs after the start of equipment; lack of modern original
design solutions and high design component of the development costs of new models; the
limited experience of staff and lack of qualified professionals; the deficit for the upgrading
and ongoing activities of funds and the difficulty of obtaining loans for the furniture en-
terprises, reduction in the degree of social responsibility of the management of furniture
enterprises; the economic and financial insolvency of business entities; the slowness of the
monetary circulation in the region, the impossibility of quick and profitable sales.
Industry needs: the reorientation of domestic manufacturers on production of fur-
niture of an average price category, which remains a demand for domestic and foreign
markets; development of domestic production of progressive construction materials, in
particular wood-fiber plates of average density (MDF), the use of which as a construction
material will significantly reduce the consumption of materials and cost of furniture and,
respectively, improve the efficiency of production and competitiveness of products; the
elimination of shadow-producing of furniture, which promotes unfair competition and
negative impact on the economy of the state.
⁃⁃ cooperation with public authorities to improve public policy and increase of investment
attractiveness of the furniture industry;
⁃⁃ promoting liberalization and deregulation of business;
⁃⁃ contribution to the improvement of existing tax rules and VAT refund procedure;
⁃⁃ optimization of the rates of import duty on furniture;
191
⁃⁃ abolition of anti-dumping quotas on imports of particle boards;

⁃⁃ improvement of provision of the enterprises with domestically produced materials: chip-
board and MDF, furniture, varnishes and paints;
⁃⁃ the implementation of the strategy of import substitution through increased knowledge-in-
tensity of products and the commercialization of scientific discoveries;
⁃⁃ promotion of establishment of a timber industry cluster, which encompasses the manufac-
ture of wood and products of its processing, paper and cardboard, furniture, printing and
associated equipment that will provide a competitive advantage over major trading partners.
Conclusion
So, to sum up we can say that the formation of an effective state policy for neo-industrial
transformation of industrial production requires the following activities of neo-industrial effects:
⁃⁃ creation of conditions for the opening of production on the basis of use of own raw mate-
rials and deep processing of raw materials (pulp and paper production, manufacturing of
wood, manufacturing of basic chemical products, manufacturing of paints);
⁃⁃ implementation of major infrastructure and innovative projects of modernization of exist-
ing enterprises (manufacturing of basic chemical products);
⁃⁃ facilitation of the development of new high-tech industries and new products, promoting
innovative development by introducing technological and product innovations (pulp and
paper manufacturing, manufacturing of paints, manufacturing of fertilizers, manufacturing
of chemical fibers);
⁃⁃ focus on import substitution of industrial goods by establishing import-substituting pro-
duction (manufacturing of pesticides, pulp and paper production);
⁃⁃ improvement of customs policy instruments (manufacturing of pesticides, manufacturing
of paints);
⁃⁃ creation of conditions for development of small and medium business with the aim of in-
creasing their level of innovativeness and capability of localization of production of high-
tech products in Ukraine (manufacturing of paints);
⁃⁃ support of the development and implementation of new organizational forms of industrial
parks and industrial clusters as effective forms of public-private partnership (woodworking
industry, manufacturing of chemical products);
⁃⁃ improvement of regulatory policy (manufacturing of food products, manufacturing of basic
pharmaceutical products, light industry);
⁃⁃ creation of conditions for development of small and medium businesses with the aim of
increasing the level of innovativeness of SMEs and the opportunity to become part of the
global supply chain (manufacturing of food products, manufacturing of basic pharmaceuti-
cal products, light industry, manufacturing of footwear and leather goods);
⁃⁃ improve the system of public procurement (printing industry, manufacturing of basic phar-
maceutical products, light industry);
⁃⁃ modernization and expansion of existing facilities and construction of new facilities in
compliance with the EU legislation concerning the safety and quality of products (manufac-
turing of food products, manufacturing of basic pharmaceutical products);
192
⁃⁃ promotion of the creation of industrial parks, regional and industrial clusters, technological
platforms (production of food products, manufacturing of basic pharmaceutical products);
⁃⁃ improvement of access to new markets, particularly EU markets (manufacturing of food
products, manufacturing of basic pharmaceutical products, light industry, manufacturing
of footwear and leather goods);
⁃⁃ training and strengthening of relationships with science (food production, manufacturing
of basic pharmaceutical products);
⁃⁃ acceleration of harmonization of standards in accordance with international standards of
safety and quality of products, the introduction of the enterprises to the international safe-
ty management system (food production);
⁃⁃ focus on import substitution of industrial goods by establishing import-substituting pro-
duction (manufacturing of footwear and leather goods);
⁃⁃ promotion of localization of production/construction of large plants by foreign companies
(manufacturing of basic pharmaceutical products);
⁃⁃ improvement of customs and tax legislation (light industry).
Thus, we have identified the features of the sectoral policies targeted to specific gro-
ups of products. The types of sector policies depend on the characteristics of production
and sales of goods. Thus, fastest access to infrastructure, reducing investment and ope-
rating costs and the restriction of export of strategic raw materials should become the
components of the policy in relation to the production of standard industrial goods. For
goods that are produced in the chains of added value controlled by foreign multinationals,
the policy must provide for the existence of the free customs zone regime, the promotion
of investment. Common features which determine the specificity of the industrial enter-
prises, that produce, in particular, investment goods, is the presence of technological (pro-
duction) chains and the production of useful products. For goods, in production of which
Ukrainian producers retain control of chains of added value due to R&D, are important
measures to support exports, stimulate domestic demand (infrastructure projects, public
procurement) and conjoined government R&D funding.
Given the above, regulatory impact assessment of industrial policies (based on the
analysis of characteristics of targeting certain industrial groups) allows us to determine the
basic mechanisms of influence and priorities of neo-industrial development of the industry:
⁃⁃ provide the priority of implementation of investment projects to expand existing produc-
tion capacities and modernize domestic production on the basis of a deeper processing of
local raw materials and intermediates, the use of modern technologies, creation of closed
technological cycles of production;
⁃⁃ facilitate the organization of new modern processing industries and create new products
through the implementation of tasks in the implementation of projects for the develop-
ment of modern import-substituting industries, which are capable of producing compe-
titive commodity products that are not inferior to foreign analogues, on the basis of intro-
duction of modern technologies, promotion of production localization on the territory of
Ukraine, cooperation for the organization of joint ventures;
⁃⁃ support the entry into global value chains through: conducting applied research and deve-
lopment work in the interests of the foreign customer; cooperating in the organizational
and technological process with foreign suppliers;
193
⁃⁃ create integration structures and innovative organizational forms: industrial and technolo-
gy parks, clusters, cross-border associations;
⁃⁃ stimulate diversification and improve competitiveness of domestic products by progressive
integration of Ukraine to the internal market of the EU, overcoming technical barriers of
trade between Ukraine and the EU; take measures to improve the level of harmonization of
technical regulations and national standards with international and European ones;
⁃⁃ improve the system of education and science to provide the industry with highly qualified
personnel; modernize the relationship and formation of new mechanisms of interaction
between universities and businesses;
⁃⁃ use opportunities of European programs to the create and transmit scientific achievements
of the businesses.
References:
UNIDO. Industrial Development Report 2016 (2015). The Role of Technology and Innovation in
Inclusive and Sustainable Industrial Development. Vienna, Austria.
Antonenko, G., & Zakharov, A. (2015). Do Ukraine Need Industrial Policy?” Analytical note,
2015. Center for Economic Strategy. Retrieved from http://ces.org.ua//wp-content/uploads/2015/07/
ces_industrial_policy_20150810_en.pdf
State Statistics Service of Ukraine (2015). Retrieved from http://www.ukrstat.gov.ua
The cluster of wood and furniture production (2015). Retrieved from http://www.domv.lviv.
ua/wpfc-forum-2015
Sagal, S. (2014). Analysis of the potential of the forest sector of Ukraine and to identify the fac-
tors impeding its innovative development. Retrieved from http://caravan&trans.com/wp&content/
uploads/2014/05.pdf
Reinert, E.S. (2011). How Rich Countries Got Rich... and Why Poor Countries Stay Poor. Mos-
cow,Russia: Higher School of Economics.
Ukrainian Forester: news (2013). Retrieved from http://www.lesovod.org.ua/node/17318
Shovkun, I. (2015). Association with the EU dictates the need to revive the industry. Dzerkalo
tyzhnya, 38.
194
About the Editors

Vitalii Nitsenko
Doctor of Science (Economics), Professor, Department of
Accounting and Taxation, Faculty of Economics and Law,
Odessa I.I. Mechnikov National University, Ukraine.
A member of the Faculty of Economics and Law and Member
of the Specialized Academic Council (since 2017) and Deputy
Head of the Department (Scientific Work) since 2018.
A member of the editorial board of the following periodicals:
European Journal of Management Issues; Problems of Management
in the 21st Century; International Agricultural Management; Re-
search in Economics and Management; Market Economy: Modern
Management Theory and Practice; International Scientific Journal;
Economy and Business: Theory and Practice and others.
Tetiana Mostenska
Doctor of Science (Economics), Professor (2003), Depart-
ment of Administrative Management and Foreign Economic
Activity, National University of Life and Environmental
Sciences of Ukraine.
Graduated from the Kyiv Technological Institute of Food In-
dustry in 1982 and employed at Kyiv Technological Institute
of Food Industry (now National University of Food Techno-
logies) since 1983 as a Junior Member of Teaching Staff, Cha-
irs of Management (1983-1993), Assistant Professor; Chairs
of Management (1993-1997), Dean of Department of Econo-
mics and Management (1999-2011), Vice-Rector (2011-2016).
In 1991 defended PhD thesis, and doctoral (DSc) thesis in 2001.
Scientific interests: economic mechanism of functioning of branches of the agricultural
and industrial complex; food security, social and corporate responsibility.
The author of over 380 scientific publications on economic mechanism of functioning
of branches of the food industry (bakery, dairy, meat) and agricultural production, food
security, social and corporate responsibility.
About the Editors
Abbas Mardani
PhD, Senior Lecturer, Azman Hashim International Business
School Universiti Teknologi Malaysia, Skudai, Johor, Malaysia.
He has different awards and honors, e.g. Award of High Cita-
tions Researcher in the University, Award of High Index Re-
searcher in the University, Award of High Key Performance
Indicator (KPI) and others.
Research interests: Operation Research, Operation Manage-
ment, Information System, Sustainable Development.
A member of the editorial board of following journals: In-
ternational Journal of Sustainable Agricultural Management and
Informatics (Inderscience Publishers); CAAI Transactions on In-
telligence Technology; Jurnal Kemanusiaan (In-House Journal);
Journal of Soft Computing and Decision Support Systems.
Reviewer in the high quality journals, including Technological Economic and Development
Economy (Taylor & Francis); Applied Soft Computing (Elsevier); Neural Computing and Appli-
cations (Springer); Mathematical Problems in Engineering (Hindawi); Energies Journal (MDPI);
Natural Resources Forum a United Nations Sustainable Development Journal; British Journal of
Economics, Management & Trade and others.
196
About the Authors

Lyudmila Deyneko, DSc, Prof. Ella Sheludko, PhD, Sen. Res.
Head of the Department of Industrial Policy, Department of Industrial Policy, Institute for
Institute for Economics and Forecasting of the Economics and Forecasting of the NAS of Ukraine,
NAS of Ukraine, Kyiv, Ukraine, Kyiv, Ukraine,
deinekolv@gmail.com shellaru@mail.ru
Oksana Kyshnіrenko, PhD, Sen. Res. Vitalii Nitsenko, DSc, Prof.
Department of Industrial Policy, Institute Department of Accounting and Taxation, Odessa
for Economics and Forecasting of the NAS of I.I. Mechnikov National University, Odessa,
Ukraine, Kyiv, Ukraine, Ukraine,
kyshnoksana@gmail.com vitaliinitsenko@gmail.com
Iryna Romaniuk, PhD, Res. Olena Chukurna, PhD, Assoc. Prof.

Department of Industrial Policy, Institute for Department of Marketing, Odessa National
Economics and Forecasting of the NAS of Ukraine, Polytechnic University, Odessa, Ukraine,
Kyiv, Ukraine, elenachukurna@gmail.com
irina.rom.gm@gmail.com
Maryna Ponomarova, PhD, Assoc. Prof. Sergey Nezdoyminov, PhD, Assoc. Prof.
Department of Marketing, Entrepreneurship and Department of Tourism, Hotel and Restaurant
Production Organization, Kharkiv National Business, Odessa National Economic University,
Agrarian University named after V.V. Dokuchayev, Оdessa, Ukraine,
univerms@ukr.net 2072945@gmail.com
Olga Shykina, PhD, Assoc. Prof. Natalya Andryeyeva, DSc, Chief Res.
Department of Tourism, Hotel and Restaurant Department of Economic and Environmental
Business, Odessa National Economic University, Problems of Seaside Regions, Institute of Market
Оdessa, Ukraine, Problems and Economic and Environmental
katzchen.gusyeva@gmail.com Studies of National Academy of Sciences of
Ukraine, Odessa, Ukraine,
andreevann@ukr.net
Daria Zinkovska, MA, Assist. Prof. Olha Yevdokimova, MA, Sen. Lect.
Marketing Department, Odessa National Department of Economy and Enterprise,
Economic University, Odessa, Ukraine, Odessa State Academy of Civil Engineering and
dasha.zinkowskaya@gmail.com Architecture, Odessa, Ukraine,
mamedovna1980@gmail.com
About the Authors
Olena Moskalenko, PhD, Assoc. Prof. Roman Piskunov, PhD, Assoc. Prof.
Department of Accounting and Audit, Kharkiv Department of Accounting and Audit, Kharkiv
Education and Science Institute of the University Education and Science Institute of the University
of Banking, Kharkiv Education and Science of Banking, Kharkiv, Ukraine,
Institute of the University of Banking, Kharkiv, piskunov@gmail.com
Ukraine,
moskalenko.elena@gmail.com
Veronika Kostyanyk, MA Volodymyr Panteleiev, DSc, Prof.
Department of Accounting and Audit, Kharkiv Department of Account and taxation, Kyiv,
Education and Science Institute of the University National Academy of Statistics, Account and
of Banking, Kharkiv Education and Science Audit, Kyiv, Ukraine,
Institute of the University of Banking, Kharkiv, bernstain@ukr.net
Ukraine,
kostyanikv@mail.ru
Oleg Zakharchenko, PhD, Assoc. Prof. Kostiantyn Bezverkhyi, PhD
Department of Management and Marketing, Department of Аccount and Taxation, SHEE
Odessa State Academy of Engineering and "Kyiv National Economic University named after
Architecture, Odessa, Ukraine, Vadym Hetman", Kyiv, Ukraine,
robin_a@ukr.net kosticbv@ukr.net
Oleksandra Ralko, PhD, Assoc. Prof. Iryna Hanzhurenko, PhD, Sen. Res.
Department of Production and Investment m\ Department of Transportation Market Services,
Management, National University of Life and Institute Of Market Problems And Economic &
Environmental Sciences of Ukraine, Kyiv, Ecological Researches of the National Academy Of
Ukraine, Sciences Of Ukraine
alexandra-ralko@hotmail.com hanzhurenkoirina@gmail.com
Nadya Burdeina, PhD, Assoc. Prof. Sergii Kolodynskyi , DSc, Prof.
Department of Organization of Logistics, Odessa Department of Management and Marketing,
Military Academy, Odessa, Ukraine Odessa State Academy of Engineering and
nadine-burd@rambler.ru Architecture, Odessa, Ukraine,
kolodi@ukr.net
Nor Zafir Md Salleh, PhD, Sen. Lect. Maksym Hodyashchev, PhD, Assist.
Azman Hashim International Business School Prof.
at Universiti Teknologi Malaysia, Skudai-Johor- Department of Management and Marketing
Malaysia, East-Ukrainian National University of V. Dal,
zafir@utm.my Severodonetsk, Ukraine,
inm85@mail.ru
Tetiana L. Mostenska, DSc, Prof. Konstantin Pavlov, DSc, Prof.
Department of Production and investment Head of the Department of Economics and
management, National University of Life and Management, Private Educational Institution of
Environmental Sciences of Ukraine, Kyiv, Higher Professional Education “Kama Institute
Ukraine, of Humanitarian and Engineering Technologies”,
5194050@bigmir.net Kama, Udmurtia, Russian Federation,
kvp_ruk@mail.ru
198
About the Authors
Nataliia Mamontenko, PhD, Assoc. Prof. Liliya Nikiforova, PhD, Assist. Prof.
Department of Management of Foreign Economic Department of Business Economics and Production
and Innovation Activities, Odessa National Management, Vinnytsia National Technical
Polytechnic University, Odessa, Ukraine, University, Vinnytsia, Ukraine,
n.s.mamontenko@mzeid.in brasik@ukr.net
Anatoliy Shiyan, PhD, Assist. Prof. Iryna Shkrabak, DSc, Prof.
Department of Management and Information Depratment of Management, Donbas State
Security, Vinnitsia National Technical University, Engineering Academy, Kramatorsk, Ukraine
Vinnytsia, Ukraine, irina0703@ukr.net
anatoliy.a.shiyan@gmale.com
Abbas Mardani, PhD, Sen. Lect. Ungku Norulkamar Ahmad, PhD,
Azman Hashim International Business School Assoc. Prof.
at Universiti Teknologi Malaysia, Skudai-Johor, Director of Business Administation Department
Malaysia, in Azman Hashim International Business School
mabbas3@live.utm.my at Universiti Teknologi Malaysia, Skudai-Johor,
Malaysia,
m-nkamar@utm.my
Zaleha Omain, PhD, Sen. Lect. Mohamed Ayyub Hassan, PhD, Sen.
Azman Hashim International Business School Lect.
at Universiti Teknologi Malaysia, Skudai-Johor, Faculty of Social Science and Humanities, School
Malaysia, of Human Resource Development & Psychology
zaleha@utm.my at Universiti Teknologi Malaysia, Skudai-Johor,
Malaysia,
ayyub@utm.my
Halimah Mohd Yusof, PhD, Sen. Lect. Oleksandr Darushin, PhD
Faculty of Social Science and Humanities, School Department of Management and Marketing,
of Human Resource Development & Psychology Odessa State Academy of Engineering and
at Universiti Teknologi Malaysia, Skudai-Johor, Architecture, Odessa, Ukraine,
Malaysia, darvinok@gmail.com
halimahmy@utm.my
Norhayati Zakuan, PhD, Assoc. Prof. Nataliia Rekova, PhD, DSc, Prof.
Head of Server Quality Research Group in Azman Head of economic Panel in Azman Hashim
Hashim International Business School (AHIBS) International Business School at Universiti
at Universiti Teknologi Malaysia (UTM), Skudai- Teknologi Malaysia, Skudai-Johor, Malaysia,
Johor, Malaysia, nanthakumar@utm.my, n4nantha@yahoo.com
norhayatimz@utm.my
Roshazlizawati Mohd Nor
Senior Lecturer in Azman Hashim International
Business School (AHIBS) at Universiti Teknologi
Malaysia (UTM), Skudai- Johor- Malaysia
roshazlizawati@utm.my
199
MANAGEMENT OF
A monograph
edited by reviewed by:

Scientific and
Leading editors: Alvydas Baležentis
Katarzyna Glabicka-Auleytner
Vitalii Nitsenko Svitlana Gutkevych
Tetiana Mostenska Mykola Parchomets
Abbas Mardani Olena Dragan
Vitalii Nitsenko, Tetiana Mostenska, Abbas Mardani (scientific editors).

Management of enterprise development in the conditions of institutional
changes and reforming of the economy. A monograph. -Odessa - Kyiv -
Skudai-Johor - Olsztyn: Bookmarked Publishing & Editing, 2019. -Bibliogr. –
Iliustr. - 200 p.
ISBN 978-83-952465-4-8
BOOKMARKED PUBLISHING & EDITING

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"In modern conditions, institutional changes and economic reform have direct impact on

Prof. Dr. Alvydas Baležentis

Odessa – Kyiv – Skudai-Johor – Olsztyn

OFFICIAL REVIEWERS OF THE MONOGRAPH:

SCIENTIFIC EDITORS OF THE MONOGRAPH:

TECHNICAL EDITOR OF THE MONOGRAPH:

GRAPHIC DESIGN AND TYPOGRAPHY:

Vitalii Nitsenko, Tetiana Mostenska, Abbas Mardani (scientific editors). Management of

© 2019 Odessa I.I. Mechnikov National University

an entrepreneurial strategy is not an exception. To solve this problem, it is advisable to use

5. the formation of regions with sectoral diversification;

I t is well-known that innovations are a necessary condition for economic develop-

1. Historical origin of higher education institutions and science in USSR

2. The model for working of innovation institutions in Ukraine

Fig. 1. Dynamic game for working of innovation institutions

From Eq. 4, it follows that Δ>0.

Let us estimate Δ for Ukrainian conditions.

∆ = 0.685P0 + 0.3E1 + 0.118 E 2 − 0.04

I d = 0.072 P0 − 1.4 E1 − 1.222E 2 − 1.06

0.76 P00 − 1.1(E1 + E 2 + E3 ) − 0.96E

3. Mechanism for correcting the innovation institutions in Russia and

a master’s degree and Ph.D. in economics education at universities in developed countries.

4. Empirical evidence for Ukraine (and comparative with Russia)

International relations in the field of economic education and research in economics

regulation and management of the national economy becomes particularly important. It is

occur in a fundamentally different form and be implemented by other methods. In this

S ocio-economic reform, aimed at the formation of a developed market environ-

Thus, analyzing the stability of radical socio-economic transformations, the stability

Case 1. The stability of the reform in terms of the parameter (indicator) a

Case 2. Instability of reform in terms of the parameter (indicator) a

Option 2. Exceeding the lower criterion (threshold) value

Option 4. Exceedance of the temporary criterion (threshold) value

Source: prepared by the authors.

It is quite possible the combination of variant 4 and one of variants 1-3.

to consider other aspects of environmental sustainability – biological, geographic, etc.,

1. The essence and concept of business activity

Table 1. The definition of commercial activity by foreign and domestic scientists

The main parameter to analyze business

Business activity means the efforts that the company is

Unlike the existing economic literature in modern interpretations copyright defi-

Affects the position occupied

Allows to evaluate the

Provides continuous monitoring

Fig. 1. The key features of business activity

2. The management of business activity

Significance of social and economic control is determined in proportion to its econo-

motivation techniques; psychological methods; methods of economic incentives; organi-

nistrative activity is coordination the actions of subordinates. Without organizational and

Jacuba, M. (2004). Problems of assessment of market activity of industrial enterprises in mo-

D evelopment is a necessary condition for the existence of organizations, which al-

Table 1. Synthesis of the views of scientists on the definition of development

Table 2. Synthesis of the views of scientists on the definition of organizational development

As in the case of definition of development, the organizational development of scien-

Table 3. Trends of organizational development

corresponding organization of various social groups. An impulse to organizational dy-

⁃⁃ the holistic approach to organization is another important setting of modern organizatio-

variables. Organization Development Journal, 20 (2), 59–70.

C hanges in the market environment require corresponding changes in the control

transactions. Conduction of separate consolidated accounting is considered inappropriate.

2. The main phases of the operation

3. The place and role of the consolidated financial statements in achie-

4. Providing management team means business accounting, reporting

5. A parent (holding) company – CFS nominator