management

1

Włodzimierz Sroka, Joanna Kurowska-Pysz, Łukasz Wróblewski & Jana Klieštiková (Eds.)

NEW TRENDS IN

MANAGEMENT: REGIONAL AND CROSS-BORDER PERSPECTIVES

London Scientific LS

WSB University

London 2018

2

3 Włodzimierz Sroka, Joanna Kurowska-Pysz, Łukasz Wróblewski & Jana Klieštiková (Eds.)

NEW TRENDS IN

MANAGEMENT: REGIONAL AND CROSS-BORDER PERSPECTIVES

London Scientific LS

WSB University

London 2018

4 Copyright © by the WSB University 2018 Reviewers: Natanya Meyer, North West University, South Africa Jolita Greblikaite, Aleksandras Stulginskis University, Kaunas, Lithuania All rights for this book reserved. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of copyright owner. Correction: Proofers Limited Editors: Edward Mitek [email protected] Aleksandra Puchalska [email protected] Cover design: Aleksandra Sroka Organizacja Międzynarodowej Konferencji Naukowej: 5th International Scientific Conference New Trends in Management and Production Engineering – Regional, Cross-Border and Global Perspectives – zadanie finansowane w ramach umowy 892/P-DUN/2018 ze środków Ministra Nauki i Szkolnictwa Wyższego przeznaczonych na działalność upowszechniającą naukę. Organization of the International Scientific Conference: 5th International Scientific Conference New Trends in Management and Production Engineering – Regional, Cross-Border and Global Perspectives – task financed under agreement 892/P-DUN/2018 from the funds of The Minister of Science and Higher Education for activities promoting learning.

ISBN 978-0-9954618-4-0 Printed in Poland by Fabryka Druku, Warsaw www.fabrykadruku.pl First published 2018 Published by London Scientific Ltd. www.londonscientific.co.uk London Scientific 71-75 Shelton Street Covent Garden, London WC2H 9JQ UNITED KINGDOM tel.: + 44 (0) 7497 815 515

WSB University Cieplaka Street No. 1c 41-300 Dąbrowa Górnicza POLAND tel.: +48 32 295 93 59

London 2018

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Table of contents Foreword ..................................................................................................................

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Chapter 1.

Regional and sectoral development: Theoretical aspects and dilemmas of practice .................................................................................................................

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1. Elena Vetrova, Lyudmila Lapochkina Review of modern theories of industrial development ...............................

13

2. Petra Daníšek Matušková Cohesion policy in the Moravian-Silesian Region in the programming period 2007–2013 ......................................................

27

3. Armenia Androniceanu, Irina Alexandra Georgescu Regional policy in Romania: Main changes and dilemmas of practice .........................................................................................................

37

4. Olawale Isaac Wale-Awe Mergers and acquisitions in the banking sector: Lessons from Nigeria ....

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Chapter 2.

Management of the company .............................................................................

69

1. Jarmila Šebestová, Žaneta Rylková, Petra Krejčí, Monika Lejková Different strategic goals in the same business environment: Competent entrepreneurs or just luck? .........................................................

71

2. Anna Bazan-Bulanda Agile PM: The possibility of using Timeboxes in projects implemented as public orders ........................................................................

83

3. Iwona Gawron, Sławomir Ziółkowski The role of trust in a knowledge-based economy .......................................

93

4. Dalibor Šimek, Roman Šperka Business process management implementation: The literature review and framework proposal for low process mature companies .......

109

5. Grzegorz Kunikowski, George Nezlek, Christian Trefftz Voronoi diagram modeling for defining developing energy markets .......

131

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Table of contents

Chapter 3.

Marketing in the organization ...........................................................................

147

1. George Lazaroiu, Viera Valjaskova Branding via green marketing: New trends in contemporary managerial practice .........................................................................................

149

2. Margareta Nadanyiova, Lubica Gajanova, Dominika Moravcikova The impact of personal branding on the customer value-based pricing strategy ................................................................................................

163

3. Kristína Predanocyová Consumer behavior not behaviour on the Slovak market for meat and meat products ....................................................................................

179

4. Ludmila Bahmane, Alexander Demin Instruments of a transmarket approach in building an innovative marketing strategy .........................................................................................

197

Chapter 4.

Financial, legal and IT aspects of management ..............................................

219

1. Katarzyna Sieradzka Sources of financing for development of start-ups in Europe ................

221

2. Josef Kašík Correlation between corruption and GDP in European countries ..........

237

3. Elvira Nica, Jana Klieštiková, Mária Kováčová Legislative challenges for insolvency management in V4 countries ......

251

4. Olaniyi Evans Digital government: ICT and public sector management in Africa ........

269

About the editors ......................................................................................................

287

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Foreword In modern business one observes numerous changes in the sphere of functioning of the companies. These trends include inter alia globalization, rapid technical and technological growth, cooperative ventures between the companies (irrespective of their forms), occurrence of new management concepts and others. Under these new circumstances, effective management may reduce the risk which is inherently associated with the company’s activity. Given these facts, modern managers should have knowledge about factors which are crucial in the management process. Therefore, the mission of this monograph, which is written by scholars from several countries, is a complex presentation of the most important topics associated with the new trends in management. The contents of this monograph are presented in four chapters: Chapter 1. Regional and sectoral development: Theoretical aspects and dilemmas of practice Chapter 2. Management of the company Chapter 3. Marketing in the organization Chapter 4. Financial, legal and IT aspects of management In the first chapter, the issues associated with regional development have been presented. It consists of three papers. The first paper is entitled “Review of modern theories of industrial development”. It analyses the state of the theory of industrial development at the present stage, and on this basis, substantiates the transformation of Russian industry and its state regulation. In turn, the second paper entitled “Cohesion policy in the Moravian-Silesian Region in the programming period 2007–2013” describes and evaluates funding from European Structural and Investment Funds in the Moravian-Silesian Region in the programming period 2007–2013. The next paper in this chapter (entitled “Regional policy in Romania: main changes and dilemmas of practice”),

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Foreword

discusses the main dilemmas and tendencies of regional development in Romania in the years 2015–2016. And finally, the last paper is entitled “Mergers and acquisitions in the banking sector: Lessons from Nigeria” and presents a picture of the Nigerian banking sector after the consolidation process. The topics of the papers presented in this part of the monograph show that it may be regarded as some kind of introduction to the whole monograph. In turn, the second chapter comprises papers devoted to general management of the company. Five papers have been presented here. The fist paper is entitled “Different strategic goals in the same business environment: competent entrepreneurs or just luck?”. The study, which is based on the results of an empirical study (210 respondents) in the Czech Republic explains how competencies are important in the period of growth. The main goal of the second paper in this chapter which is entitled “Agile PM: The possibility of using Timeboxes in projects implemented as a public order” is to assess the possibility of using Timeboxes in projects implemented as public orders. In turn, the third paper discusses the topic of the “The role of trust in a knowledge-based economy” from various perspectives: unit, organization and market. “Business process management implementation: The literature review and framework proposal for low process mature companies” is the title of the fourth paper in this chapter. Its authors claim that in times of rapidly changing environment, one of the greatest barriers companies face is the problem with the implementation of new business process management approaches. And finally, in the last paper in this chapter entitled “Voronoi diagram modeling for defining developing energy markets”, the authors demonstrate the applicability of this approach to the problems of defining and implementing secondary energy markets for the Baltic Region. The third chapter in the monograph is devoted to marketing aspects in organizations and comprises four papers. Its first article is entitled “Branding via green marketing: new trends in contemporary managerial practice”. Its goal is to enrich the theory of green branding with the aspect of national psychographic specificities and to create a matrix of green marketing strategies for a specific market. By using methods of description, comparison, analysis and synthesis the essence of personal branding is defined. The second paper deals with personal branding in the specific conditions of the Slovak Republic. It is entitled “The impact of personal branding on the customer value-based pricing strategy”. The next paper in the chapter, “Consumer behaviour on the Slovak market for meat and meat products” identifies consumer behaviour towards meat and meat products including factors affecting consumer decision making. And the last paper in this chapter, “Instruments of transmarket approach in building of innovative marketing strategy”, is devoted to

Foreword

9

the possibility of applying a number of methods of market-to-market interaction to business structures, which strengthens a company’s competitive position in modern markets. The last chapter raises the topic of financial, legal and IT aspects of management and consists of four papers. The first paper, “Sources of financing for development of start-ups in Europe”, analyses and evaluates sources of financing for European start-ups, with particular emphasis on the situation in the Polish market. In turn, the author of the second paper entitled “Correlation between corruption and GDP in European Countries” tests the hypothesis that corruption measured by the Corruption Perceptions Index is highly correlated with the gross domestic product per capita. The hypothesis is tested on the data of European countries in the period 2013–2017. In turn, the authors of the third article “Legislative challenges for insolvency management in V4 countries” dedicate it to the insolvency law de lege lata in the context of the application of a dual approach based on a special analysis of the so-called model legislation and legal regulations of V4 countries. The last paper in this chapter, “Digital government: ICT and public sector management in Africa” examines the effect of information and communication technologies (ICT) on public sector management in Africa for the period 1995–2015 using a panel GMM model and Toda-Yamamoto causality tests. The empirical evidence shows that ICT has a positive and statistically significant effect on public sector management, meaning that an increase in ICT is associated with improved public sector management. One should stress that a wide spectrum of topics which are important for the management of companies in the modern economy has been presented here. Therefore, the monograph has a number of advantages, including presentation of the point of view of different scholars from several countries, alongside simple and understandable language or application of practical cases. We believe that a combination of theory and practice, merged with the nature of the texts presented here have allowed us to meet the mission of this monograph. This, it has been designed for a wide group of recipients, including scholars, managers, and students of management science.

December 2018

Włodzimierz Sroka, Joanna Kurowska-Pysz, Łukasz Wróblewski & Jana Klieštiková

10

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Chapter 1.

Regional and sectoral development: Theoretical aspects and dilemmas of practice 1. Elena Vetrova, Lyudmila Lapochkina: Review of modern theories of industrial development 2. Petra Daníšek Matušková: Cohesion policy in the Moravian-Silesian region in the programming period 2007–2013 3. Armenia Androniceanu, Irina Alexandra Georgescu: Regional policy in Romania: Main changes and dilemmas of practice 4. Olawale Isaac Wale-Awe: Mergers and acquisitions in the banking sector: Lessons from Nigeria

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Chapter 1. Regional and sectoral development: theoretical aspects and dilemmas...

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Elena Vetrova

e-mail: [email protected] Saint Petersburg State University of Economics (UNECON)

Lyudmila Lapochkina

e-mail: [email protected] Northern (Arctic) Federal University, Severodvinsk branch

Review of modern theories of industrial development Abstract. Economic growth and development on the basis of factors of production were investigated in the works by A. Smith and in K. Marx’s theory of primitive accumulation. Further development of A. Smith’s economic theory gave birth to two lines of research: the theory of the firm and competition theory. Within the present review we provide no special detailed analysis of these research lines because we are more interested in the development theories in which both the lines find their reflection. It enables us to understand the reasons and factors underlying industrial development both at the micro and the macro level. The state of industry in Russia can be characterized as problematic. Industrial development trends at the present stage, in spite of the efforts of the state, are not encouraging. This situation calls for clarification of possible reasons for this situation and trends of industrial policy adjustments to achieve both industrial development and an increase in the efficiency of state regulation. The problems studied by the authors are typical for other countries as well. The purpose of this article is to analyze the state of the theory of industrial development at the present stage, and on this basis, to substantiate the transformation of Russian industry and its state regulation. The research methodology is based on a comparative analysis of Russian and foreign cyclical theories, scientific, technical, cluster and innovation development in industry, and government regulation theory. The article includes a critical review of the existing industrial development theories, which have revealed their characteristics and a current trend of merging these theories. The main provisions of the modern theory of industrial development should be considered when making strategic decisions, including at the state level. Growing industrial development issues give reason to assume that there are some contradictions between the theory and its practical implementation. Thus, it is necessary to evaluate the ongoing transformation of the theoretical and practical aspects and determine the direction of their

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alignment. This analysis is characterized by specific scientific results obtained by the author. Assessment of the basic provisions of the theory of industrial development in retrospect and at the modern stage have allowed the authors to substantiate conclusions and proposals for the transformation of Russian industry in the direction of technological development, the search for effective systems of interaction between business, government, science and education. The authors suggest focusing further research on identifying the effective instruments of state industrial policy, which are aimed at achieving industrial development and the effectiveness of state regulation of development. Key words: business; cluster development; cycling; government regulation; industrial development; technology; science and development

Introduction The current state of industry in Russia is problematic and is the subject of scientific and practical discussions. The tendencies of industrial development are not optimistic at the present stage, despite the efforts of the state. It is relevant to analyze theories of industrial development because the current changes in industry are subject to certain regulation and must be taken into account when making strategic decisions, including at the state level. Industry of the twenty-first century is fundamentally different from the industry of the nineteenth to twentieth centuries, due to trends: the emergence of new industries, technological changes, the development of energy, including alternative sources, shifts in the location of manufacturing industries to Asian, Latin American and African countries, the development of logistics methods of supply management, means of communication, etc. The listed determines the ongoing transformations in industry, which are subject to certain regulation, which should be taken into account when making strategic decisions and at the state level. So, it is important to analyze and to assess the consistency of the main provisions of the modern theory of industrial development for substantiation of the transformations in Russian industry in order to overcome existing problems. There are a number of studies on selected aspects of industrial development. In addition to the classics of industrial development theory, such as Schumpeter (2007), Kondratiev (1925) and others presented in this article, the works of such scientists as Babkin (2015), Tatarkin (2015), Krasnyuk (2016), Kuznetsov and Mezhevich and others (2016) should be noted. Their research

E. Vetrova, L. Lapochkina: Review of modern theories of industrial development

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was carried out at various levels – to a greater extent at sectoral and regional levels – and was devoted to specific issues of structural, cyclical, innovative, technological, cluster and other development options. The analysis of problems of industrial development transformation showed that sources available in the scientific literature can be divided into groups: these are works on the theory of industrial development of a general theoretical nature: –– devoted to problems and prospects of industrial development at various levels, mostly in terms of sectoral and regional aspects (Karlik et al., 2015; Krasniuk, 2016; Vetrova et al., 2015); –– such as in which the methodological aspects of industrial development are developed, most often in the framework of any one theoretical direction (Tatarkin, 2015; Babkin, 2015; Babkin and Novikov, 2016). –– in which the main emphasis in the processes of transformation of industrial development is based on the possibility of state regulation, in particular on industrial policy (Karlik and Katenev, 2015; Kuznetsov and Mezhevich, 2016; Tatarkin et al., 2015); –– devoted more to the scientific, technical and technological aspects of industrial development (Tatarkin et al., 2015; Perez 2000, 2009, 2013; Dementev, 2011, 2013; Glazev, 1993; Lvov and Glazev, 1985). At the same time, not enough systematic work on the generalization of theoretical experience with the formulation of problems and directions for the transformation of industrial development in modern conditions has been identified without reference to a particular industry or region of Russia, or the content does not fully reflect the objective nature of the current changes in industry. This determines the relevance of the studies and the significance of the results.

Scientific hypothesis The main provisions of the modern theory of industrial development must be taken into account when making strategic decisions also at the state level. The growing problems of industrial development suggest that there are some contradictions in the theory and its practical implementation. Thus, it is necessary to evaluate the ongoing transformations in theoretical and practical aspects and determine the directions for their harmonization. This characterizes the scientific result we have obtained.

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The purpose of this research is a critical analysis of the main provisions of the theory of industrial development at the present stage to determine the rationale for the direction of transformation of Russian industry and its state regulation.

1. Methodology of research The research methodology is based on a comparative analysis of Russian and foreign theories of cyclic, scientific and technical, cluster and innovation development in industry, as well as the theory of state regulation. Economics and growth and development on the basis of factors of production were investigated in the works of Smith and Marx (theory of initial accumulation). Further development of the economic theory of Smith is reflected in the allocation of two areas of research: the theory of the firm and the theory of competition. In the framework of this article, they are not considered separately, since the most interesting are modern theories of industrial development, in which both these directions are reflected. This allows us to understand the causes and factors that determine the development of industry both at micro- and macro-levels. Among the modern theories of industrial development, in the first place, the work of Kondratieff and Schumpeter should be noted; they, for the first time, presented the results of studies of wave-like changes in a number of parameters in the process of economic development. Schumpeter (2007) considered economic growth, goods and money in movement towards each other, calling this movement a circular flow. Economic development disrupts the course of the circular flow, brings to life new industries and stops the existence of obsolete ones. Thus, he explained the development of industries and structural changes in the economy. It was Schumpeter who first introduced the distinction between economic growth and economic development into economic science. Under economic development, he proposed to understand the changes in five different directions. The theory of Schumpeter reveals the role of innovation and entrepreneurship in the processes of economic development. The followers of J. Schumpeter examined in detail the peculiarities of such economic development, developed the theory and substantiated the emergence of clusters in its framework, but did not pay enough attention to the influence of other factors, in particular institutional ones.


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The concept of large cycles, developed by Kondratiev (1925), allows us to present the general laws of development as a process. At the heart of large cycles lie the processes associated with the renewal of long-term elements of fixed capital (production facilities, buildings and infrastructure), processes caused by major upheavals in engineering and technologies. This theory helps to more clearly present the laws of development. It promotes the study of qualitative changes in the development of the economy, in the sphere of socio-economic and interrelated processes. The cycles of Kitchin (1923) Juglar (1862) and Kuznets (1930) complement and refine the theory of the cyclical development of industry. Perez (2000), developing the idea of the role of the industrial revolution in the economy, determines the influence of technological changes on the formation and change of the institutional environment, which also acts as a factor of economic development. It should be noted that the factors of economic development have been studied quite actively, for example by Vetrova et al., (2015) or Dement’ev (2013). The concept of technological structures combines studies of fluctuations of economic development in the technological, economic, institutional, managerial and sociological fields (Lvov and Glazev, 1985; Glazev, 1993). The initial prerequisite of this concept is the property of technological conjugation of industries associated in the technological chains of manufacturing of final products, which determines the synchronization of the development of production processes, which creates the material basis of cyclical fluctuations. The unevenness of technological development remains insufficiently studied. One of the modern trends is the concept of “technologies of wide application” (Dementev, 2011 p.14). Within the framework of this concept, economic development is the result of a periodic renewal of technologies, which requires changes in resource provision and fundamental changes in the technological base of production. Here we are talking about investments, including renewal of fixed assets, which is confirmed by the theory of the cycles of Juglar and Kuznets. Developing his theory, Perez (2013) argues that, depending on the situation, innovation and the industrial revolution in different ways affect economic development. At the present stage, globalization is an important factor, in the conditions of which there are equal opportunities for development, but for successful competition in the market, they should be differentiated. At the same time, the range of technological changes is huge, and information

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technology allows virtually any industry to develop in a revolutionary way. And in these conditions, institutional development has a special significance that Perez sees in three interdependent directions of development: creative healthy people, a stable planet and complete global development. Thus, the importance of the knowledge economy and the concept of sustainable development for industry are justified, which we consider particularly valuable in modern conditions. In another of his studies, Perez (2009) considers the paradigm shift of economic development caused by the transformation processes, including through information technology. In these conditions, it is necessary to change the strategies and concepts of industrial development: from rigid mass production to flexible networks, from centralized ones to decentralized adaptive structures, from human resources to human capital; for developing countries: from those protected by state subsidized industry to competitive products on the global market. Thus, it justifies the expediency of developing clusters, the priority of the knowledge economy and human capital as factors of industrial development in new conditions, as well as the development of competition. Florida (2007) notes the role of knowledge in the development of the modern economy, which clarifies the importance of intellectual capital and considers its formation at the country level on the basis of the development of the creative class – talented people, skilled specialists in various fields. Despite the controversial points, this idea of the dependence of the country’s economic development on the level and activity of its creative class, which is the basis of human capital and the potential of the country, region, enterprise and which acts as an ideologist, initiator and organizer of all socio-economic processes, deserves approval. In this connection, the policy of many countries to create conditions for successful activity and attract talented people as well as qualified specialists from other countries is understandable. The negative practice of the outflow of such specialists from Russia, which reflects the shortcomings of the existing state policy on this issue should be noted. Perez (2013) develops the idea of industrial revolution’s role in economic development, points out the influence of technological changes on formation and modification of the institutional environment, which also acts as a factor of economic development. In this case, everything depends on how the decision is made. Important are the institutional conditions in which decisions are made and the diffusion of innovation. Studies by Schumpeterians showed that the spread of innovation is a logistic curve, i.e., there is a certain limit of saturation, which must be predictable, in time to switch


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to new technologies. The described tendencies are also characteristic for the industries, each of which has its own life cycle before the stage of decline along the logistic curve. And at the stage of maturity, and better – before its onset, decisions on the introduction of new technologies, switching to other technologies, products and / or markets are needed; structural changes are necessary both at the level of the enterprise, the industry, and at the level of the entire industry. In addition, changes in the share of processing activities are necessary in the structure of the industry itself. Thus, the necessity of a structural industrial policy for realizing the goals of industrial development of the economy is substantiated (Vetrova et al., 2015). An integral part of the theory of industrial development and the practice of universally modern practice is the theory of clusters. The ideologist of this theory is Porter (1993), who for the first time introduced the concept of “cluster”, considering it as an association of firms of various industries that can effectively use internal resources to achieve international competitiveness. Thus, Porter viewed the cluster as an industrial and territorial complex in which enterprises are technologically connected, which has become an alternative to the sectorial approach. It should be noted that Porter did not distinguish in his studies the role of the state in clustering the economy. This was done in subsequent studies and today is one of the most discussed problems, for example by Kuznetsov and Mezhevich (2016) or Karlik and Katenev (2015). Thus, it was revealed that regional clusters are most effective, and the region is viewed not as an administrative unit, but as a technologically interconnected complex of economic entities and their infrastructures located in a certain territory. At the same time, the state begins to play a significant role, in the formation of various clusters. Thus, macro-regional clusters are formed. Here it is necessary to note the works of the American scientist R. Florida on clustering. Depending on the policy of the state-participant of the cluster, Florida (2008) identifies its following types: –– North American – the formation of a cluster on the basis of a local initiative under state incentives for regional bodies on the basis of grants; –– Western European – a key role played by universities and research institutes on the basis of state funding of scientific research and the formation of innovative infrastructure; –– Scandinavian – formed on the initiative of the government, using research and technological cooperation; the state implements targeted investing of funds in the most promising clusters;

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–– Indian – in which funding is provided through foreign investment; priorities are selected by the state on the basis of the export orientation criterion; –– Chinese – formed on the initiative of the government and regions by creating special zones for the development of high-tech industries; funding is provided through grants from the government and venture funds; the policy of attracting foreign specialists is used; –– Japanese – which is engaged in the government and regional authorities on the basis of support in the form of the development of innovation infrastructure (technopolis); the practice of attracting foreign specialists is also used. The leading role of the cluster theory in the development of industry is explained by the fact that in the cluster, the processes of diffusion of innovations occur more efficiently in terms of the target orientation and time. A whole range of modern works is devoted to these problems, for example Babkin and Novikov (2016). In Russian practice, attempts are being made to build their own cluster model that takes into account foreign experience and Russian specifics. A certain generalization of the described theories of industrial development and public administration can be noted in the works of Tatarkin and his followers. Tatarkin offers a model of a new industrialization, which is understood as a synchronous process of creating new high-tech sectors of the economy and effective innovative renewal of traditional sectors with socially agreed qualitative changes in the technical, economic and socio-institutional spheres through interactive technological, social, political and managerial changes (Tatarkin, 2015). That is, certain aspects and / or theories are synthesized into a practically oriented model of industrial development, taking into account Russian realities. It should be noted that modern theories of industrial development affect the micro-level. Here we should mention the theory of industrial organization, most fully represented by Tyrol (1996) who was awarded the Nobel Prize. The scientist considers in aggregate three major problems and directions in the organization of industry: the theory of the firm, its scales, types of activities, organization and behavior; theory of competition in terms of the firm’s ability to acquire market power, the form of manifestation, the factors of preservation and loss of power, price and non-price rivalry; the theory of the relationship between business and government, i.e. industrial policy. There was a significant event for the industry in 2011, the term “Industry 4.0” was introduced, denoting the fourth industrial revolution (Pasko, 2018).


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The foundations of Industry 4.0 are interoperability (compatibility), virtualization, decentralization and real-time work. Cyberphysical systems, cloud computing and large data technologies as well as the Internet of Things (IoT) are becoming more popular in business, along with vertical and horizontal integration, virtualization and “digitization” of the entire process of creating a value chain. The proposed approach to the organization of production processes is built on the ubiquitous application of cyberphysical systems, which is an analogue of self-organizing technical complexes. These complexes are able to analyze their own work and on the basis of the analysis, to make the necessary adjustments without human participation (Lipkin, 2017). Systematization of relevant modern theories of industrial development with an emphasis on their contribution is presented in Table 1. Table 1. Contribution of modern theories of industrial development Theory of Industrial Development

Author

Result

Theory of development

Schumpeter et al.

Determined the importance of innovation in the development of industry

Theories of cyclic development

Kondratiev, Kitchin, Juglyar and Kuznets

They proved the need to take into account the cyclical factors of industrial development

Theory of scientific and technological development

Perez

Indicated the influence of scientific and technological progress on the development of industry

Economics of knowledge

Florida

They proved the need to prioritize human capital

Theory of clusters, Territorial production complexes

Porter, Kolosovsky

Introduced effective forms of interaction between enterprises

The theory of industrial organization

Tyrol

Determined the need to rationalize internal processes in an industrial enterprise

Theory of state regulation

All authors have made a certain contribution

Different variants of industrial policy are proposed

Industry 4.0

Interdisciplinary research

Compatibility, virtualization, decentralization and real-time workflow

Source: own elaboration.

Thus, at the present stage we observe, to a certain extent, the merging of all theories of industrial development. This means there is a need to use an integrated approach when deciding on the directions for transforming this development at various levels: at the state level in the formation of the economic, including foreign economic, innovation and industrial policies, as well

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as at the regional, local and enterprise levels, where this policy is ultimately realized. At the same time, state policy should be flexible, in particular, horizontally oriented; that is, it is not the fact of state intervention that is important, but how it intervenes, what tools it uses to achieve structural changes (Rodrik, 2009). This characterizes the scientific result we have obtained. It is necessary to clarify the existing definition of transformation (Babkin and Novikov, 2016) as kinds of changes relating to rigid elements of transformation, the objectives and mission of the enterprise in the short and medium term, which is a qualitative and quantitative change in the property complex and its place in the regional, commodity markets, only to a simple object of transformation – the enterprise. We define the transformation of industrial development as the transformation of structures, forms and methods, changing the target orientation of the functioning of objects and subjects of industrial development. As objects of industrial development can be represented as separate enterprises, their associations, complexes, clusters, etc., and subjects can be at different levels – state, regional or local – their interests should be coordinated, and their efforts should be aimed at the transformation trough industrial sector of the economy. Thus, we single out the following main directions of transformation of industrial development: structural changes in industry, priority of human capital and knowledge economy, expediency of cluster development, development of competition, etc. as factors of industrial development in new conditions. We support and consider the following transformations in industry as actual for Russia: –– structural changes in the economy towards an increase in the share of its industrial sector with a predominance of processing activities; –– the convergence of science and production systems, and in some cases, for mature technology, its diffusion and further development in production systems; –– expansion of the concept of “technology” and its transfer to all spheres, that is, the use of organizational, social, financial and other technologies to achieve market competitiveness; at the same time, the state should modernize its activities, developing the social sphere. At the same time, the criterion for the effectiveness of the development of technology and enterprise and state, in the final analysis, should be the quality of life of the population:


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–– constant interaction between users of technology, research and design organizations, based on various forms of –– cooperation, clustering, the creation of corporate structures, etc.; –– expansion of the circle of participants in the innovation process due to the motivation of all employees of production and socio-economic systems and other stakeholders regardless of the level of representation of these systems. At the same time, it seems important to develop effective tools for industrial policy, which are aimed both at achieving the goals of industrial development, and the interests of the subjects of this policy. We consider it expedient to single out the following directions for state industrial policy, which are equally important and in the implementation of which priorities should be singled out: research and development for the formation of a bank of intellectual capital (fundamental research); technological development and modernization of export industries; general technological development, including entrepreneurial activity, small and medium business, education system, infrastructure, financial and other services, etc.; the development of technologies aimed at improving the quality of life of the population, taking into account the specific needs of each specific locality, and stimulating general innovation activity to solve local problems.

2. Results of the research A critical analysis of the main provisions of the theory of industrial development of the economy at the present stage has revealed a convergence of theories of industrial development in terms of global and country aspects. Structural changes in industry, the priority of human capital and the knowledge economy, the expediency of developing clusters, the development of competition, etc., as factors in the development of industry under new conditions, are based on the proposed directions for the transformation of Russia’s industrial development. To ensure the transformation processes of industrial development, directions for changing state regulation are formulated, based on the use of the concept of a horizontally oriented industrial policy. It is especially important to unite the efforts of the state, business, science and education.

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Conclusions The conducted research has shown that at the present stage, existing theories of industrial development are inexpedient for consideration locally in relation to the economic system or the object. It is necessary to take them into account in aggregate and use them in strategic decisions at various levels of management to ensure the efficiency of the transformation processes in industry. A review of theories of industrial development was presented at the conference and published by Pasko (2018). The most important direction for further research is the formation of effective instruments of state industrial policy on the basis of the situational synthesis of industrial development theories. The situational nature of the synthesis of theories of industrial development, in our opinion, is determined on the basis of the need to harmonize the goals of industrial development and the objectives of industrial policy on the basis of the criterion of national economic efficiency. This has certain features and differences, which are based on the spatial, sectoral and resource characteristics of Russian industry, as well as the state’s interests in industrial development.

References Babkin A.V. (ed.) (2015), Restrukturizatsiia ekonomiki: teoriia i instrumentarii, St. Petersburg State Polytechnical University. Babkin A.V., Novikov A.O. (2016), Cluster as a subject of economy: essence, current state, development, St. Petersburg State Polytechnical University Journal. Economics, 1(235): 9–29. Dement’ev V.E. (2013), Strukturnye faktory tekhnologicheskogo razvitiia, Ekonomika i matematicheskie metody, 49(4). Dement’ev V.E. (2011), Investment problems of an innovation pause in the economy. Studies on Russian economic development, Forecasting Problems, 22(4): 13–27. Florida R. (2007), Kreativnyi klass: liudi, kotorye meniaiut budushchee, Moscow: Klassika XXI. Florida R. (2008), Megaregiony: znachimost’ mesta, Harvard Business Review Rossiia, Aprel. Glaz’ev S.Iu. (1993), Teoriia dolgosrochnogo tekhnikoekonomicheskogo razvitiia, Moscow: VlaDar. Juglar C. (1862), Des Crises Commercials Et De Leur Retour Periodique En France, Paris, Guillaumin. Karlik A.E., Galaev A.P., Veig N.V. (2015), Ekonomicheskii krizis i problemy syr’evoi modeli razvitiia. Ekonomicheskie nauki, 125: 21–29.


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Karlik A.E., Katenev V.V. (2015), Sankt-Peterburgskaia promyshlennost’: vozmozhnosti i problemy importozameshcheniia, Voprosy ekonomiki i prava, 90: 64–66. Kitchin Jo. (1923), Cycles and trends in economic factors, Review of Economics and Statistics, 5(1): 10–16. Kondrat’ev N.D. (1925), Bol’shie tsikly kon”iunktury, Moscow, Economica. Krasniuk L.K. (2016), Diagnosis of stages of economic development and the formation of the paradigm of neoindustrialization of the Russian industry, St. Petersburg State Polytechnical University Journal. Economics, 1(235): 158–166. Kuznets S. (1930), Secular movements in production and prices. Their nature and their bearing upon cyclical fluctuations, Boston: Houghton Mifflin. Kuznetsov S.V., Mezhevich N.M. (2016), Industry of Russia: external factors of internal modernization, St. Petersburg State Polytechnical University Journal. Economics, 1(235): 126–133. Lipkin E. (2017), Industry 4.0: Intelligent technologies – a key element in industrial competition, Moscow: Ostez-SMT. L’vov D.S., Glaz’ev S.Iu. (1985), Teoreticheskie i prikladnye aspekty upravleniia NTP, Ekonomika i matematicheskie metody, 1. p.226-231. Pasko I. (2018), What you need to know about Industry 4.0 and the Internet of things, available at: http:// therunet.com/articles/4826, (accessed 25 March 2018). Perez C. (2000), Change of paradigm in science & technology policy, Cooperation South, TCDC-UNDP, 1: 41–48. Perez C. (2013), The new technological revolution, Presentation at the Technology Frontiers Forum of The Economists, 2013, March 5. Perez C. (2009), Technological revolutions and techno-economic paradigms, Working Papers in Technology Governance and Economic Dynamics, 20: 26. Porter M. (1993), Mezhdunarodnaia konkurentsiia. Moscow: Mezhdunarodnye otnosheniia. Rodrik D. (2009), Industrial policy: don’t ask why, ask how, Middle East Development Journal, 1(1): 1–29. Shumpeter I.A. (2007), Teoriia ekonomicheskogo razvitiia, Moscow: Eksmo. Tatarkin A.I. (2015), Novaia industrializatsiia ekonomiki Rossii: potrebnost’ razvitiia i vyzovy vremeni, Ekonomicheskoe vozrozhdenie Rossii, 2(44): 20–31. Tatarkin A., Andreeva E., Ratner A. (2015), Instrumenty importozameshcheniia: perspektivy rossiiskikh regionov, Problemy teorii i praktiki upravleniia, 6: 45–53. Tirol’ Zh. (1996), Rynki i rynochnaia vlast’: Teoriia organizatsii promyshlennosti, SPb.: Ekon. shk. Vetrova E.N., Lapochkina L.V., Rokhchin V.E. (2015), Problemy regulirovaniia promyshlennogo razvitiia v sovremennykh usloviiakh: ucheb, Posobie, SPb.: Izdvo SPbGEU.

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Elena Vetrova – Doctor of Economics, Professor, Department of Economics and Management of Enterprises and Producing Complexes, St. Petersburg State Economic University, Russian Federation. She obtained her engineering degree in the branch of the St. Petersburg State Maritime Technical University in Severodvinsk, the degree candidate of economic sciences at the St. Petersburg State Economic University in logistics, and a doctorate in economics in industry. She has more than 20 years of professional experience as a speaker at conferences on economic development. She is an expert in the field of strategic management and industry of JSC Gazprom, the Russian Academy of Sciences. Lyudmila Lapochkina is an Associate Professor, Department of Economics and Management, Northern (Arctic) Federal University named after M.V. Lomonosov, Russian Federation. She obtained her engineering degree in the branch of the St. Petersburg State Maritime Technical University in Severodvinsk, the degree candidate of economic sciences at the St. Petersburg State Economic University in economics of industry. She has more than 20 years of professional experience as a teacher of economic disciplines and speaker at conferences on economic development.

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Petra Daníšek Matušková

VŠB – Technical University of Ostrava [email protected]

Cohesion policy in the Moravian-Silesian Region in the programming period 2007–2013 Abstract. One of the key policies of the European Union is cohesion policy. Its goal is to reduce disparities in regional development, strengthen economics, social and territorial cohesion in the scope of the EU. Funding from European Structural and Investment Funds is an important source for individual European regions. The main aim of this paper is to analyse and evaluate funding from European Structural and Investment Funds in the Moravian-Silesian Region in the programming period 2007–2013. Keywords: structural funds; European Union; cohesion policy; Moravian-Silesian region

Introduction Increasing regional disparities within Central and Eastern European (CEE) countries stimulated interest in regional policies in the late 1990s. This interest was further strengthened by the eastern enlargement of the EU in 2004 (Pénzes, 2013) because financing from the Structural and Investment Funds (hereafter referred to as EU funds) has become the main source for financing regional development (e.g. Wokoun, 2007). Support from EU funds has decisively influenced both national and regional structural policies (e.g. Czyz and Hauke, 2011). Consequently, research on associations between regional disparities within CEE countries on the one hand, and EU funds allocation on the other, is fully substantiated from the political viewpoint (Novosák at al., 2017). The cohesion policy is one of the key elements of the European integration process. Its main purpose is to promote economic growth and speed up the economic convergence among EU member states and regions (European Communities, 2006). The importance of the cohesion policy and its funding

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has rapidly two decades. EU funds represent the key instrument for the implementation of the European cohesion policy. There are five funds. The European Regional Development Fund focuses on modernizing and strengthening the economy. It supports investment (infrastructure) projects, e.g. road and railway construction, sports facilities development, cultural site renovation, etc. It was founded in 1975, and it has remained the largest fund in terms of the volume of finances. The European Social Fund (ESF) has been supporting activities relating to employment and human resources development since 1957. The fund is focused on non-investment projects, such as special programmes for unemployed, disabled persons, youth, etc.. The Cohesion Fund aims to support the development of poorer countries, not regions, and provides finances for large investment projects e.g. Trans-European Networks. The fund was established in 1993. The European Agricultural Fund for Rural Development (EAFRD) supports European policy on rural development and finances are used to increase agriculture and forestry competitiveness, improve the environment and landscape, etc.. The European Maritime and Fisheries Fund (EMFF) represents a financial instrument to support fisheries. The fund supports projects leading to higher competitiveness and environmental protection. It finances activities related to marine and inland fisheries (e.g. mud dredging of ponds), and also provides investment for modernization of the processing industry, etc.. Apart from Structural and Investment Funds there is a whole range of other theme-oriented multinational funds established by the European Union. The eligibility of the regions of the EU member states to the objectives of cohesion policy is assessed according to the level of their GDP per capita reached at the level of NUTS II. Many countries can use cohesion policy for their whole territory. This is the case for Central European countries in the programming period 2007–2013, for which cohesion policy was the dominant instrument of regional development (Hájek et al., 2014). The disposition of cohesion policy requires mapping the financial allocation of EU funds including evaluation of the effectiveness of spending. Many Czech and foreign papers deal with this issue (e.g. Blažek and Macešková, 2010; Hájek et al., 2012; MacKay and Williams, 2005; Gripaios, 2002, Dall‘Erba and Le Gallo, 2007; Ederveen et al., 2006). Decision making in the European Union is followed at different levels. In the case of regional policy, this fact can be observed in the coexistence of European and national objectives of regional policy, which does not have to be necessarily coherent, even in terms of spatial aspects. Financial sources are allocated according to the level of regions NUTS II, but goals of regional policy can be formulated at another (lower) level (e.g. O ‘Leary, 2005; Hudson, 2007).

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P. Daníšek Matušková: Cohesion policy in the Moravian-Silesian Region in...

The main priorities and objectives of cohesion policy are specified in The Community Strategic Guidelines for cohesion policy. For the regional policy of the EU in the programming period 2007–2013 three goals were set, namely: Convergence; Regional Competitiveness and Employment; European Territorial Cooperation. For these goals EUR 347 billion from EU funds were reserved. These objectives and set priorities must be respected by member states of the EU when their own operational programmes are formed. The task of all member states is to develop a National Development Framework (for the programming period 2007–2013, this was the National Strategic Reference Framework (NSRF)), which respects national conditions. This framework defines the state strategy, which leads to fulfilment of objectives of cohesion policy in the EU and defines national operational programmes. Through operational programmes, finance from EU funds is drawn. For the 2007–2013 programming period, the Czech Republic determined the following strategic objectives: Strategic objective I: Competitive Czech economy; Strategic objective II: Open, flexible and cohesive society; Strategic objective III: Attractive environment; Strategic objective IV: Balanced territorial development. In this programming period, the Czech Republic formulated and used 26 operational programmes, which were divided into the three economic and social cohesion policy objectives. There were seven regional operational programmes (hereafter referred to as ROP) for the cohesion regions NUTS II with an allocation of €4.66 billion; eight thematic operational programmes with a total allocated amount of €21.23 billion; two operational programmes for the capital city of Prague with an allocation of €0.42 billion; and remaining operational programmes with €0.39 billion which were focused on supporting cross-border, interregional and transnational cooperation amongst regions. The financial allocation of cohesion policy for 2007–2013 is presented in Table 1. Table 1. Financial allocation of EU funds Objectives

Total amount for EU27 in billion EUR

%

Total amount for Czech Republic in billion EUR

%

Convergence

283

81.54

25.88

96.68

Regional Competitiveness and Employment

54.96

15.95

419.09

1.56

European Territorial Cooperation

8.72

2.52

389.05

1.46

Total

347

100

26.69

100

Source: www.strukturalni-fondy.cz

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The cohesion region Moravia-Silesia (hereafter referred to as Moravia-Silesia) represents one of eight cohesion regions at the level NUTS II in the Czech Republic. Its area is identical to the Moravian-Silesian Region. The nature of the area is very inhomogeneous. The centre of the region is industrial and the marginal parts are made up of typically rural areas. The following amount of money for Moravia-Silesia was prepared from the EU funds: €734.27mn from the regional operational programme NUTS II Moravia-Silesia, which is intended only for this region; additionally, it tried to get a certain amount from all eight thematic programmes (€21.23 bn) and programmes for cross-border cooperation (€0.39 bn).

1. Data and methodology Publicly available data are used in this paper. The main source of data is the list of projects for the programming period 2007–2013 from June 2016 available from dotaceEU.cz and other relevant information provided by this website. The list of projects provided information about applicants, the status of projects, amounts of funding and more. But there is not information about specific EU fund which were used for financing. This problem is not solved by connection with data from the list of applicants because a common identifier does not exist. Another problem is how to determine how many funds really flow into the territory of a region. Although, the place of implementation for a project appears as the correct identifier, there is a relatively fundamental problem. Many projects, which are implemented in Moravia-Silesia are not implemented by regional applicants and vice versa. This is problem especially in terms of comparison of regions or issues of effectiveness of subsidies. Therefore, the data is modified only for projects which are implemented in this region and are requested by local (regional) entities. For analysis is used to tools of Excel from Microsoft. The following text summarizes the information about projects, which are financed from EU funds and implemented in the territory of Moravia-Silesia.


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2. Moravia-Silesia and the drawing of EU funds In the Moravia-Silesia Region it was decided to implement 9 919 projects with a total cost of CZK 144 487mn (irrespective of the applicant´s registered office). These projects were supported by CZK 106 509mn from public resources (such as the state budget, EU funds etc.). From EU funds CZK 88 000mn was approved, which represents 83% of the total authorized funds. In total, 1 710 projects with a total cost of CZK 15 256mn were finalized. Finalized projects were funded from public funds in the amount CZK 8 774mn and remaining value was paid from EU funds. Moravia-Silesia requested funds from 11 operational programmes from 26 possible programmes. The most funds were drawn from ROP NUTS II Moravia-Silesia, the operational programme for Transport and the operational programme for the Environment. However, applicants for subsidies for the Moravian-Silesian region could have their headquarters outside of the region as well, for example cohesion regions South East, Prague, Central Moravia, as well as foreign entities mainly from neighbouring Poland. Table 2. Total amounts paid from EU funds Name of Programme

Total amounts paid from EU funds in CZK

CZ.1.01 OP Transport

19 874 000 147

CZ.1.02 OP Environment

16 369 017 192

CZ.1.03 OP Enterprise and Innovation

10 490 823 627

CZ.1.04 OP Human Resources and Employment

3 818 512 689

CZ.1.05 OP Research and Development for Innovations

3 362 195 946

CZ.1.06 Integrated Operational Programme

4 051 782 702

CZ.1.07 OP Education for Competitiveness

4 012 658 496

CZ.1.08 OP Technical Assistance

13 866 900

CZ.1.10 ROP NUTS II Moravia-Silesia

19 917 408 421

CZ.1.25 OP Fishing

20 904 811

CZ.3.22 OP Cross-Border Cooperation CR-Poland

155 478 565

Total

82 086 649 495


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The following values are based on adjusted data, i.e. there are excluded institutions, which do not have a registered office in the Moravian-Silesian region. EU funds were supposed to support projects to the value of CZK 64 168mn. Up to June 2016 almost 92% of the promised amount (CZK 58 982mn) was accounted for and paid. Overall, 1 657 projects were finalized. The following table summarizes the drawdown of funds through operational programmes. Table 3. The subsidies according to the operational programs Name of Programme

Amount in overall agreement in CZK

Total paid amounts in CZK

CZ.1.01 OP Transport

481 938 916

453 489 455

CZ.1.02 OP Environment

16 585 026 006

16 125 655 988

CZ.1.03 OP Enterprise and Innovation

9 779 004 124

9 014 555 882

CZ.1.04 OP Human Resources and Employment

3 514 542 081

3 135 389 467

CZ.1.05 OP Research and Development for Innovations

3 499 750 626

3 362 195 946

CZ.1.06 Integrated Operational Programme

4 400 523 145

3 997 684 250

CZ.1.07 OP Education for Competitiveness

4 279 999 594

3 966 317 582

CZ.1.08 OP Technical Assistance

15 876 864

13 866 900

CZ.1.10 ROP NUTS II Moravia-Silesia

21 554 977 668

18 837 405 527

CZ.1.25 OP Fishing

19 645 763

18 831 346

CZ.3.22 OP Cross-Border Cooperation CR-Poland

37 135 190

56 833 550

Total

64 168 419 975

58 982 225 892


The above table shows information through which programmes the projects were funded. The most funds were drawn through ROP NUTS II Moravia-Silesia (33.59%). This fact points to the purpose of the regional operational programmes. These programmes were designed to solve problems of a specific region and to be available for institutions, which really know the regional problems. From this program, the largest amount was spent on regional infrastructure and accessibility (39%), urban development (25%) and promoting prosperity of the region (24%); the least resources went to rural development (8%), and the remaining part fell to technical assistance. Another important financing program was OP Environment (25.88%).


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Another important programme, from the point of view of the volume of drawn funds, was OP Environment (25.88%). The volume of funds from this program points to an environmental issue in Moravia-Silesia. Overall, 44% of funds for this programme were directed for improvement of air quality, 24% for water infrastructure and reduction of flood risk, and 21% for sustainable use of energy; the remaining funds were then moved to the other four priority axes. The third most important source of funding was OP Enterprise and Innovation (15.26%); from this programme 40% supported development of firms, 24% was used for improvement of the business environment and innovation and 22% of funds supported the innovation; the remaining part of the funds was spread over the other priority axes. Most of the projects were approved for the territory (defined as LAU 2) of Moravská Ostrava a Přívoz, for which there were 450 projects; for Ostrava-Jih, there were 391 projects; 365 projects for Opava; 353 projects for Frýdek-Místek and 245 projects for Bruntál. In 90 municipalities out of 322 fewer than 5 projects were implemented. However, if we focus on the volume of approved funds, then there is another order. The largest volume of funds, almost CZK 6 848mn, was promised to Moravská Ostrava a Přívoz; Ostrava-Jih was promised almost CZK 4 027mn; Třinec had almost CZK 4 018 mn approved; Ostrava-Poruba had more than CZK 3 645 mn approved, and Opava was allocated CZK 3 643 mn. The most applicants came from Ostrava, Frýdek-Místek, Opava, Krnov a Třinec. According to the economic-legal form, the most frequent applicants for subsidies from EU funds were entrepreneurial subjects, which applied for 2 664 projects for CZK 21 052 mn; next were municipalities which submitted 2 504 projects for CZK 17 635 mn and Moravia-Silesia with 229 projects for almost CZK 10 910mn. In contrast, the smallest beneficiaries were the non-profit sector with 176 projects for CZK 790 mn and the state and its institutions and organizations with 52 projects for CZK 1 369 mn. The composition of the recipients of subsidies is shown in the following figure.

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Figure 1. Composition of the recipients A

H

G 2%

7%

4%

A. Chamber, professional and interest assoca�ons

B 17%

B. Region

C 1% 33%

C. Non-profit sector D. �unicipali�es E. Other

F

28% 8% E

F. Enterpreneurial subjects

D

G. State and its ins�tu�ons and organiza�ons H. Educa�ona� and research ins�tu�ons

Source: list of projects, own calculations.

What is important to note is the fact that only 12% of projects were finalized from the beginning of the programming period to June 2016. Overall, 35% of projects has their expenditure certified by the paying and certifying authority, 25% of projects had finished financing and more than 15% of projects were in the realization phase.

Conclusions Cohesion policy has undergone significant development from its beginnings. In the beginning, the insignificant policy was focused on supporting regions afflicted by heavy industry and underdeveloped rural regions. Currently, cohesion policy is one of the most important EU policies; it ensures the competitiveness of Europe in the world and helps to meet the challenges of the 21st century. The main instruments of this policy are Structural and Investment Funds. Priorities defined in the national operational programs are funded through the Structural and Investment Funds. Operational programs are defined by member states of the EU within the National Strategic Framework. For the programming period 2007–2013 more than €26bn was allocated for the Czech Republic. In the conversion these amounts to per capita,


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the Czech Republic was the biggest beneficiary. Drawing funds was problematic, because there were a large number of programs and managing authorities. The main aim of this paper was to analyse and evaluate funding from European Structural and Investment Funds in the Moravian-Silesian Region in the programming period 2007–2013. For analysis publicly available data was used. The main results of this paper may be summarized as follows. The cohesion region Moravia-Silesia gained more than CZK 58bn from EU funds. This is 92% of the resources from all promised funds for this region. The largest amount of funds covered goals, which were defined in a regional operational programme for Moravia-Silesia. The most supported areas were regional infrastructure and accessibility, improvement of air quality and urban development. The main limitations were incomplete and outdated data. Data can be found in different lists for which a common identifier does not exist. Another problem is that the residence of applicants can be located outside a region in which a project is realized. Therefore, the exact effect of the subsidy cannot be determined. European subsidies represent an extensive and actual area for exploration and detailed analysis. Acknowledgements This work was supported by the SGS project of VSB-TU Ostrava under No. SP2018/92. The support is greatly acknowledged.

References Blažek, J., Macešková, M. (2010), Regional analysis of public capital expenditure: To which regions is public capital expenditure channeled – to ‘rich’ or to ‘poor’ ones?, Regional Studies 44(6): 679–696. Council Regulation (EC) No. 1083/2006 of 11 July 2006. Official Journal of the European Union, available at: https://eur-lex.europa.eu/legal-content/EN/ TXT/PDF/?uri=CELEX:32006R1083&from=EN. Czyz, T., Hauke, J. (2011), Evolution of regional disparities in Poland, Quaestiones Geographicae, 30(2): 35–48. Dall‘erba, S., Le Gallo, J. (2007), The impact of EU regional support on growth and employment, Czech Journal of Economics and Finance, 57(7): 325–340. DotaceEU.cz, available at: http://www.strukturalni-fondy.cz/cs/Uvod, (accessed 28 May 2018).

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Ederveen, S., Groot, H.L., Nahuis, R. (2006), Fertile soil for structural funds? a panel data analysis of the conditional effectiveness of European cohesion policy, Kyklos, 59(1): 17–42. Gripaois, P. (2002), Regional Spending: A Comment on MacKay, Regional Studies, 36(6): 685–689. Hájek, O., Novosák, J., Zahradník, P., Bednář, P. (2012), Regionální disparity a financování regionální politik – některé poznatky z České republiky, Politická ekonomie, 60(3): 330–348. Hájek, O., Smékalová, L., Novosák, J., Zahradník, P. (2014), Prostorová koherence národní a evropské regionální politiky: Poznatky z České republiky a Slovenska, Politická ekonomie. 62(5): 630–644. Hudson, R. (2007), Regions and regional uneven development forever? some reflective comments upon theory and practice, Regional Studies, 41(9): 1149–1160. Mackay, R.R., Williams, J. (2005), Thinking about need: Public spending on the regions, Regional Studies, 39(6): 815–828. Novosák, J., Hájek, O., Horváth, P., Nekolová, J. (2017), Structural funding and intrastate regional disparities in post-communist countries, Transylvanian Review of Administrative Sciences, 51: 53–69. O’Leary, E. (2005), Regional disparities in Ireland: the roles of demography, profit outflows, productivity, structural change and regional policy 1960–1996, Berlin: Springer. Pénzes, J. (2013), The dimensions of peripheral areas and their restructuring in Central Europe, Hungarian Geographical Bulletin, 62(4): 373–386. Wokoun, R. (2007), Regionální a strukturální politika (politika soudržnosti) Evropské unie v programovém období 2007–2013, Urbanismus a územní rozvoj, 10(1): 3–7. Petra Daníšek Matušková is a member of the Department of Regional and Environmental Economics, Faculty of Economics, VSB-Technical University of Ostrava. Her research interests include regional policy, locational decision-making of firms and local and regional finance.

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Armenia Androniceanu

e-mail: [email protected]

Irina Alexandra Georgescu

e-mail: [email protected] The Bucharest University of Economic Studies, Bucharest, Romania

Regional policy in Romania: Main changes and dilemmas of practice Abstract. One of the main objectives of the EU is to decrease socio-economic gaps by applying various development policies. The assessment of economic disparities at the regional level in Romania is periodically done in order to identify the areas to which investment should be directed. The regional policy initially had the main objective of reducing the existing regional imbalances, stimulating balanced development, the revitalization of disadvantaged areas, as well as the stimulation of inter-regional cooperation. This paper discusses the concept of regional decentralization, the main types of disparities and dilemmas, and the particularities of Romania’s macro regions. The principal component analysis is performed to show the representation of the main macroeconomic indicators on the quadrants and the correlations between them. Furthermore, the k-means clustering algorithm is applied to the 42 counties of Romania, a classification of the clusters is undertaken and a comparison between clusters and the level of living standard is obtained. Our research finds out not only the main dilemmas and vulnerabilities of the Romania’s macro-regions, but also the counties with the most problems generating imbalances in the regions. The results of our research demonstrate that there is a need to revise significantly the development policies of the macro regions of Romania.

Introduction Regional development policy is one of the most important and most complex policies of the European Union. Its main objective is to reduce the existing economic and social disparities between different regions of Europe (Becerra-Alonso et al., 2017; Ohanyan and Androniceanu, 2017). There is a wide variety of organizational arrangements at the EU level due to the political, legislative and administrative diversity that characterizes the Member

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States. From the point of view of legal status, the term region as well as the regionalization imply a series of political and administrative peculiarities in the European states. In a report to the European Parliament, five types of regionalization have been identified in Europe, depending on where the regions are located within constitutional and administrative structures: administrative regionalization (deconcentration), regionalization of local communities; regional decentralization; institutional decentralization and regionalization through federal authorities/states. Administrative regionalization is the creation by the state of authorities subordinated to the government. It implies the existence of a certain legal autonomy, but the actions are controlled by the state. This type of regionalization does not actually imply the administrative existence of the region. In the EU, administrative regionalization characterizes Greece, Portugal, Sweden, Slovenia, Hungary, Estonia and Lithuania. Regionalization through local governments implies that some management functions are taken over by local governments through decentralization (broad-based cooperation). It differs from administrative regionalization by the fact that the regionalization is carried out through decentralized institutions acting within their own power framework. It exists in Germany, Denmark, Finland and Ireland. Regional decentralization involves the creation of a new territorial and administrative entity with limited financial autonomy and a specific institutional framework (Enderstein, 2017). However, these units do not have legislative power. Regional decentralization is met in France, Great Britain, Sweden, Poland, the Czech Republic and Slovakia. Institutional regionalization implies the existence of regions as territorial administrative units that are also assigned legislative power (Antošová et al., 2017; Pavelková et al., 2017; Bobáková, 2017). This involves amending the Constitution and affecting the structure of the state. Practically, governments are set up at regional level. This regionalization model is considered the ideal model and is found in Spain, Italy, Belgium, Great Britain and Portugal. Regionalization through federal authorities implies the existence of a state characterized by increased decentralization, functioning on the principle of guaranteeing the autonomy of the units that make up it. It exists in Belgium, Germany and Austria (or, outside the EU, good examples are Switzerland and the USA). Considering this classification, we consider that Romania is in the second type, regionalization through local communities. Romania’s development regions are not administrative-territorial units and do not have legal personality, but some management functions are taken over by local governments through decentralization, and there are two institutions with regional responsibilities: the Regional Development Council and the Regional Development Agency. Regarding these types of regionalization, we can mention the fact that, in general, a certain region passes from one form to another as it acquires new

A. Androniceanu, I.A. Georgescu: Regional policy in Romania: Main changes...

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powers from an administrative, legislative and financial point of view. Due to the specificity of each unit, within the same state, there may be regions that are in different stages of the regionalization process. Our study in Romania reflects the impact of regional development policies in recent years and its main dilemmas. This analysis was undertaken using clusters. Cluster analysis, also known as segmentation or taxonomy analysis, aims to identify a set of homogeneous groups by grouping elements, so as to minimize variation within the group and maximize variation between groups. The comparative analysis of the country’s regions becomes even more important as the issue of globalization becomes even more pressing, or globalization can also be seen as a manifestation at national level if we consider the harmonious development of the regions and the reduction of the differences between their levels of development (Macháček, 2017; Popescu Ljungholm, 2017). Regional development as a continuous process of development, aims to reduce the socio-economic development differences in a certain territory, while stimulating its development potential (Tcherneva, 2017; Sroka et al., 2016; Nica, 2017). Our research highlights some fundamental correlations between macroeconomic indicators and the development of counties grouped within the regions (Thiel, 2017). Through cluster analysis, our research shows the effects and the dilemmas of interregional policies at the national level in the years 2015–2016.

1. Particularities of Romania’s macro regions Regions are the framework for developing, implementing and evaluating regional development policies and collecting specific statistical data. In Romania, macro regions are regional subdivisions established in 1998 by Law 151/1998. These regions are not administrative-territorial units; they are administrative areas that provide a framework for the implementation and evaluation of regional development policy and the collection of specific statistical data according to the European regulations issued by EUROSTAT for the second level of NUTS classification II, existing in the European Union. Each region is coordinated by one agency for regional development, these being non-governmental, non-profit bodies, of public utility, with legal personality. At each regional level there is a Regional Development Agency (RDA). RDA headquarters are in the following municipalities: Piatra-Neamt, Brăila, Calarasi, Craiova, Timişoara, Cluj-Napoca, Alba-Iulia and Bucharest, with agencies having offices in each of the component counties.

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The counties of the regions have different levels of development and complementary savings. This was one of the criteria for the aggregation of counties in the regions, together with that of contiguity and size. The development regions are eight statistical sizes having the main purpose allocating funds from the European Union to regional development. Figure 1 shows the eight macro regions of Romania. Figure 1. Representation of the eight macro regions of Romania

6 7

5 4

1

3

2

BUCUREȘTI

Source: http://moradoconsulting.ro/regiunile-de-dezvoltare/

The counties of Romania grouped in the eight macro regions and main parameters can be seen in Table 1. Table 1. The eight macro regions of Romania, structure, surface and population

Location

Macro regions and counties of Romania

Surface (km2)

%

Population (people)

Bucharest – Ilfov

1821

0.76%

2226457

Centre consists of the following counties: Alba, Brasov, Covasna, Harghita, Mures and Sibiu

34100

14.30%

2523021


Location

Macro regions and counties of Romania

41

Surface (km2)

%

Population (people)

North-East consists of the following counties: Bacău, Botoşani, Iaşi, Neamţ, Suceava and Vaslui

36850

15.46%

3674367

North-West consists of the following counties: Bihor, Bistrita-Nasaud, Cluj, Maramures, Satu-Mare and Salaj

34159

14.33%

2740064

The South-East Region comprises the following counties: Brăila, Buzău, Constanţa, Galaţi, Tulcea and Vrancea

35762

15.00%

2848219

The South-Muntenia Region consists of the following counties: Arges, Calarasi, Dambovita, Giurgiu, Ialomita, Prahova and Teleorman

34453

14.45%

3379406

South-West Oltenia consists of the following counties: Dolj, Gorj, Mehedinti, Olt and Valcea

29212

12.25%

2330792

The West Region consists of the following counties: Arad, Caras-Severin, Hunedoara and Timis

32034

13.44%

1958648

Source: National Institute of Statistics, 2015.

In 2017, the Bucharest-Ilfov Region contributed 27.3% of GDP at the national level, according to data published by the National Commission for Strategy and Prognosis. The amount made together with the South-Muntenia Region, within which it is positioned, was almost 40% of the GDP of Romania. At the opposite pole was the South-West Oltenia Region, comprising the poorest counties in the country, which accounted for only 7.5% of the total GDP. Due to somewhat smaller dimensions (only four component counties, Timis, Arad, Hunedoara and Caras-Severin), the country’s second-largest living region, reached 10% of the total GDP only. However, given the concentration of population in the capital area of the country, from an economic point of view, the division into the current development regions appears to be relatively balanced. Significant differences lie within the regions, where we usually find a relatively strong county, located in a ratio ranging from 3.4 to 1 and 6 to 1 against the poorest county. If the general trend in 2017 was a slight reduction in intra-regional disparities, there is also a notable exception, the West Region, where Timis has passed half the total GDP (50.3%) and reached a level of production, and services located over the other three counties taken together. However, the maximum gap (about 6 to 1) occurs in the South-East Region where,

42


with 43% of the total regional contribution, Constanta surpasses Tulcea (only 7%). Muntenia South’s GDP was 12.1% of GDP, with the North-West Region occupying a share of 11.5% of GDP. If the government will allocate funds to regional development programs and delegate the authority at regional level to allocate funds to individual projects, it will be necessary to establish criteria for the distribution of funds. These criteria will include rules on cost types, co-financing, types of contributions that may be involved, etc. The 2014–2020 Regional Operational Program (REGIO), adopted by the European Commission (EC) on June 23, 2015, is the successor of the 2007–2013 Regional Operational Program and one of the programs through which Romania can access European funds in 2014–2020 from the European Regional Development Fund (ERDF). This program aims to increase economic competitiveness and improve the living conditions of local and regional communities, by supporting the development of the business environment, infrastructure conditions and services, ensuring a sustainable development of the regions, able to manage resources efficiently, exploit their potential for innovation and assimilation of technological progress.

2. The main objectives and basic principles for regional development in Romania According to Article 2a) of Law 151/1998 and Law 315 of 2004, the first objective of the regional development in Romania is „to reduce existing regional imbalances by stimulating balanced development, by accelerating delays in the development of disadvantaged areas due to historical, geographic, economic, social, political conditions, and preventing new imbalances.” The second objective of this policy is to link policies and sectoral governmental activities to the regions by stimulating initiatives and by using local and regional resources for sustainable economic and social development and cultural development. The third objective is to stimulate interregional, internal and international cooperation, cross-border cooperation, including within Euroregions, as well as the participation of development regions in European structures and organizations that promote their economic and institutional development in order to achieve projects of common interest, in accordance with the agreements to which Romania is a party.


43

The basic principles for development and implementation of regional development policies in Romania are: –– decentralization of the decision-making process, from the central/ governmental level to that of the regional communities; –– partnership between all actors involved in regional development; –– planning – resource utilization process (through programs and projects) in order to achieve established objectives; –– co-financing – the financial contribution of the various actors involved in the implementation of regional development programs and projects.

3. Main disparities and dilemmas of the interregional development in Romania Romania ranks first in the European Union in terms of inequalities between regions. In the last 15 years, inequalities in Romania have grown to such an extent that today, according to an index measuring the intensity of these inequalities, the GNI index, Romania is in first place in the European Union. That means that the economic development in the last 20 years has been accompanied by increasing inequalities within the country (Goschin et al., 2008). The problem is that the income gap between regions has grown a lot in the last 15 years. This statement is supported by two examples. The Bucharest-Ilfov region is currently at 140% of the EU’s development average, so it is far ahead. At the same time, in Romania there are counties like Vaslui, Teleorman, Giurgiu, where the level of development is about 30–35% of the EU average (Androniceanu et al., 2017). The disparities between the regions inRomania are increasingly accelerated and more visible. For example, ten years ago, Bucharest was at 70% of the EU average, and the counties mentioned above had also slightly increased, but only by a few percent.The main categories of disparities (Androniceanu et al., 2018) identified in the last two decades in Romania are as follow: –– disparities between urban and rural; –– disparities in occupancy level; –– disparities in infrastructure; –– disparities in educational and qualification levels; –– disparities in the extent of the migration phenomenon of the population; –– disparities in attracting foreign direct investment.

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One of the factors contributing to creating these big differences is education. In addition, the research-innovation infrastructure is highly spatially focused, as well as the skilled workforce or foreign direct investment, which have positioned themselves in the last 27 years, in the capital‘s region and a few other cities, including Cluj and Timisoara. The main remedy for the situation is cohesion policy and financial resources, so-called „smart specialization“. A major issue in this regional development process is related to the institutional and administrative capacity of the state to implement the existing solutions (Smékalová, 2018). Intelligent specialization refers to a development strategy that involves the presence of clusters that focus the industry or technology in a particular area. The main changes that should take place in Romania in the next period may be the following: –– improving the overall attractiveness of the regions by creating balanced economic opportunities and adequate investment in transport infrastructure, social infrastructure and business infrastructure, and by using the existing tourism and cultural potential; –– stopping the economic downturn and counteracting the potential decoupling of areas from the economic growth process, namely, urban centers and mono-industrial centers affected by industrial restructuring that face problems of adaptation to new activities, mining centers, rural areas, as well as areas which are traditionally undeveloped; –– supporting the development of urban centers with development potential to enable them to act as engines of economic growth, helping to reduce the discrepancies between urban areas and adjacent areas (urban or rural) which are poorly structured; –– supporting the process of administrative decentralization and investing in the further development of regional/local development planning/programming capacity by creating the conditions for the full implementation of the decentralization principle, as stipulated by Law 339/2004, including for cross-border cooperation activities. In the following sections we will make a principal component analysis and cluster analysis to group the counties according to some similar features. In this paper, we have combined principal component analysis and k-means clustering algorithm to analyze the socio-economic gaps between macro regions over the period 2015–2016 (Kassambara, 2017a; Kassambara, 2017b).


45

4. Regional development in Romania based on clusters and component analysis Reducing the socio-economic disparities between macro regions represents one of the main EU objectives. The problem of economic and social gaps in Romania has been debated in a large amount of literature. Oţil and Părean (2010) reached the conclusion that, in 2008, the North-Eastern region had the lowest GDP per capita. In opposition the Bucharest-Ilfov region and the Western region ranked first and second in the country. The same authors remarked that the employment rate remained constant from2000–2007. A high employment rate due to agriculture was in South-West Oltenia and also the Western region and Bucharest-Ilfov region. The latter ones are considered the most dynamic regions. Goschin et al. (2008) built a composite index of inequality based on GDP per capita, net monthly average income and unemployment rate. They ranked the 41 counties and Bucharest in four development categories. Pintilescu (2011), by applying principal component analysis, showed that, in 2008, the most important gaps were between the North-West, Western and Central regions on the one hand, and on the other, North-Eastern and Southern regions. The first group was distinguished from the second by a high level of GDP, total income and total expenditure and lower level of activity rate and unemployment rate. By empirical estimations, Rotaru (2014) showed a positive correlation between household income and the employment rate and, at the same time, a negative impact of labor productivity on employment rate in the two main regions: Northeast and West. Şteliac (2016) proved that, in 2013, the regional gaps increased in comparison to the year 1998. The main poles on the labor market were Bucharest-Ilfov and, respectively, Northeast and Southwest Oltenia. She used the method of dispersion, computed the GNI-Struck concentration coefficient and studied the influence of regional factors on the active population by applying the Shift-Share method. The macroeconomic indicators that we used were collected from the National Statistics Institute for the year 2016: the civil occupied population, gross domestic product, the monthly gross average nominal earnings on activities of the national economy, unemployment rate, the rate of abandonment in pre-university education and the number of private investors. The gross domestic product is computed as the sum of the final goods and services of resident institutional units (actual final consumption, gross fixed capital formation) plus exports minus imports of goods and services). The civil-occupied population comprises all people who have an occupation bringing an income, on the basis of a contract of employment or on its own. Besides these

46


six numerical variables, we chose a nominal one, the living standard. There are the following few criteria (*) used for the counties in 2015: –– the economic and social criterion (GDP per capita, average net salary, average pension, NET per capita savings calculated as balance between bank loans and deposits, unemployment rate, number of cars per thousand inhabitants); –– the living conditions (the population having current water, the average habitable area of the household); –– the health criterion (number of physicians existing in 1,000 inhabitants, number of hospital beds per thousand inhabitants); –– education and culture (percentage of graduates of higher education, number of teachers per thousand inhabitants); –– security (crime rate). Each criterion was assigned a number of points between 1 and 42, where 1 was ranked as the best, and 42 the weakest. The scores were added, so the counties with the lowest scores ranked first, and the counties with the most points were ranked in the last places. The classification of the counties according to the living standard became: –– Between 100 and 200 points – very high standard of living (abbreviated VH); –– Between 200 and 300 points– high living level (H); –– Between 300 and 400 points – average living level (A); –– Between 400 and 500 points – low standard of living (L); –– Over 500 points – very low living level (VL). In this classification, Bucharest was placed first, with 114 points, followed by Cluj with 143 points and Sibiu with 155 points. The counties fall within this classification as follows, by (*): –– VH – Bucharest, Cluj, Sibiu, Timiş, Braşov; –– H – Constanţa, Arad, Argeş, Gorj, Mureş, Bihor, Prahova; –– A –Ilfov, Hunedoara, Iaşi, Vâlcea, Harghita, Alba, Caraş-Severin, Satu Mare, Maramureş, Dolj, Galaţi, Bistrița-Năsăud, Covasna; –– L – Sălaj, Bacău, Neamţ, Suceava, Brăila, Dâmboviţa, Tulcea, Vrancea, Olt, Buzău; –– VL – Mehedinţi, Botoşani, Ialomiţa, Teleorman, Giurgiu, Călăraşi, Vaslui. So, the classification variable has five levels: VH, H, A, L, and VL.


47

In order to discover correlations and similarities between variables and counties, we applied principal component analysis (PCA). PCA is a statistical method used to convert a set of possibly correlated objects into a set of uncorrelated values called components (Jolliffe, 2002). The advantage of PCA is the graphical representation of the objects and variables in a factorial axes system (Table 2). Table 2. The main objects and research variables

Source: own computations.

According to Table 2, the first principal component (PC) explains 63.122% of the total variance, and the second explains 17.984% of the total variance. Cos2 (Table 2) is the square of the cosine of each principal component. The closer Cos2 is to 1, the more that PC retains the characteristics of that object. We can notice that PC1 is influenced by positive weights of attributes such as GDP (0.923), occupied population (0.959), earnings (0.886) and number of private investors (0.924). PC2 is positively influenced by the abandonment rate (0.905) and negatively by unemployment rate (-0.488). These remarks are strengthed by the correlation circle (Figure 2).

48


Figure 2. The correlation circle Variables - PCA 1.0

Unemploymentrate

0.5

Dim 2 (18%)

contrib

- 19 - 17 Earnings - 15of GDI GDP instead GDI - 13

Occupiedpopu 0.0

-0.5

Abandonmentrate -1.0

-1.0

-0.5

0.0 Dim 1 (63,1 %)

0.5

1.0


The correlation circle shows the correlation among variables. Possitively correlated variables, here all variables except for unemployment rate and abandonment rate, are grouped together. Negatively correlated variables, here unemployment rate and abandonment rate, are placed on opposed quadrants in Figure 2. In Figure 3, we can see the concentration ellipses, which offer a synthetic comparison of the five classes of living standard. One remarks the spread of the counties marked with “+”, belonging to the very high living standard on a large area of the map, having the lowest correlations with the remaining classes. Ellipses are drawn around the counties of each class, showing that L, A and H groups are more correlated to one another, and the VL group is less correlated to L, A and H groups.

49


Figure 3. Concentration ellipses Individuals – PCA 5,0

Dim 2 (18%)

2,5

+

Groups A

+

+

0,0

+

H

+

+

L VH VL

-2,5

-10

0

Dim 1 (63,1)

10


For the county clustering, we applied ak-means algorithm (MacQueen, 1967). Given a dataset, we classify it through a number of clusters fixed a priori. For each cluster, its centroid is computed (Table 3). The goal of the clustering is to place centroids as far as possible from each other. At each iteration, each object of the dataset is assigned to the nearest centroid. New centroids are computed. The algorithm stops when no more changes are possible. For this problem we decided that the appropriate number of clusters was five.

50


Table 3. Cluster centroids K-means clustering with 5 clusters of size 5, 9, 1, 11, 16 Cluster means: GDP Occupiedpopulations 1 39460.00 262.8000 2 19366.67 231.5000 3 184700.00 1174.5000 4 12563.64 178.9455 5 7213.75 110.2433

Earnings Unemploymentrate Abandonmentrate Noprivateinvestors 2801.200 3.300000 1.860000 8891.200 2681.667 4.122222 2.222222 8325.444 3995.000 1.600000 1.200000 28557.000 2310.636 6.590909 1.563636 6062.091 2217.062 6.743750 1.956250 3715.000

Clustering vector:

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 2 5 1 4 5 5 4 2 5 5 2 2 4 5 2 4 4 5 5 4 1 4 1 5 2 5 4 5 5 1 5 2 3 2 4 5 5 4 2 5 4 1

Within cluster sum of squares by cluster: [1] 637154252 128593874 0 (between_$$ / total_$$ = 97.5%

43321689

39643064


Table 3 shows the centroid foreach cluster. Bucharest distinguished itself as a self-cluster, number 3. In second position is Cluster 1, with the highest average GDP, the highest occupied population, highest earnings, and one of the lowest unemployment rates and school abandonment rates.The descending order of the clusters, from the best to the lowest, is: Cluster 1, Cluster 2, Cluster 4 and Cluster 5. The k-means clustering led to the following clusters: Cluster 1: Cluj, Constanţa, Tulcea, Prahova, Timiş. Cluster 2: Bihor, Braşov, Mureş, Sibiu, Argeş, Ilfov, Dolj, Arad, Iaşi. Cluster 3: Bucharest. Cluster 4: Maramureş, Alba, Bacău, Neamţ, Suceava, Buzău, Galaţi, Dâmboviţa, Gorj, Vâlcea, Hunedoara. Cluster 5: Bistriţa-Năsăud, Satu Mare, Sălaj, Covasna, Harghita, Botoşani, Vaslui, Brăila, Vrancea, Călăraşi, Giurgiu, Ialomiţa, Teleorman, Mehedinţi, Olt, Caraş-Severin. A graphical visualization of the clusters is presented in Figure 4.

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Figure 4. Clusters plot visualization Cl1 Cl2

Cl3

Cl4

Cl5

0

5

5

0

5

4

0

0

7

0

H

2 4

L

1

VH

2 2

VL

0

150000 100000

date$GDP

A

–

–

50000

Bucures�

–

0

Standard living/ Clusters

–l

Tulcea

Timis Cluj Constanta Iasi Suceava Brasow Mures BuzaliIalomita Gala�Doli Caras-Severin Maramures Valcea BuzauMehedint l

2

l

l

4

6

l

8

date$Unemploymentrate

l

l

10

12

3 010 0 100 0


For a comparison between clusters and the levels of living standard we obtained the contingency matrix presented in Table 4. Table 4. Contingency matrix

Standard of living/Clusters

Cl1

Cl2

Cl3

Cl4

Cl5

A H L VH VL

0 2 1 2 0

3 4 0 2 0

0 0 0 1 0

5 1 5 0 0

5 0 4 0 7


We notice that, except for Cluster 3, the clusters are not homogeneous. In the North-Western and Central regions, from2012–2016, Cluj (in Cluster 1) recorded an increasing trend in GDP, reaching the highest value in 2016. Covasna (in Cluster 5) had the lowest GDP during this period. While this indicator increased, the unemployment rate decreased. In the North-Eastern

52


and South-Eastern regions, Constanţa recorded the most significant increase in GDP and Tulcea (Cluster 1, low living standard) had the lowest values. The unemployment rate decreased most significantly in Constanţa (high living standard, Cluster 1). In South Muntenia, there was a decrease in GDP and an increase in the unemployment rate. Călăraşi (Cluster 5, very low living standard) had the lowest GDP values. In the Western region, Timiş (Cluster 1) recorded the most important increase in GDP and a low unemployment rate, while Dolj (Cluster 2, average class) located in South West Oltenia, has the highest unemployment rate.

Conclusions This paper aimed to discuss the main dilemmas and tendencies of regional development in Romania in 2015–2016. Since all the macroeconomic indicators are very sensitive to fluctuations, we can notice that the clusters are very inhomogeneous over time. Also, the five levels of living standard are combined within the five clusters. Cluster 2 is dominated by a high living standard, while Dolj in this cluster has the highest unemployment rate from 2012–2016. One of the limitations of the k-means algorithm is its sensitivity to extreme values and outliers. We can conclude that the most developed macro region is macro region 3, because of the Bucharest-Ilfov region, having the highest average GDP. Macro region 2 has the lowest average GDP. The results of our research demonstrate that there is a need to review the macro-regional development policies in Romania. Our research shows not only the main dilemmas and vulnerabilities of Romania’s macro regions, but also the counties with the most problems generating imbalances in the region.

References Androniceanu, A., Georgescu, I., Nica, E., Popescu, GH., (2018), A computational analysis of the Romanian interregional policy, Proceedings of the 31st International Business Information Management Association Conference (IBIMA), 26 April 2018, Milan, Italy, 1952–1962. Androniceanu, A., Comănescu, M., Jiroveanu, D. C. (2017), Factors with major influence on disparities across regions and their impact on economic development in Romania, Proceedings of the 29th International Business Information Management Association (IBIMA), 3–4 May 2017, Vienna, Austria, 1743–1753.


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Antošová, G., Šilhánková, V., Wokoun, R. (2017), Strategic planning in two border regions in the Czech Republic – comparison of project impact in Zlín and South Bohemia regions, Administratie si Management Public, 29: 128–140. Becerra-Alonso, D., Androniceanu, A., Georgescu, I. (2016), Sensitivity and vulnerability of European countries in time of crisis based on a new approach to data clustering and curvilinear analysis, Administratie si Management Public, 27: 46–61. Bobáková, V. (2017), The formation of regional self-government in the Slovak Republic and its sources of funding, Administratie si Management Public, 28: 97–115. Enderstein, A. (2017), European identity and gender equality policies: shaping the practice of gender expertise, Journal of Research in Gender Studies, 7(2): 109–135. Goschin, Z., Constantin, D.L., Roman, M., Ileanu, D. (2008), The current state and dynamics of regional disparities in Romania, Romanian Journal of Regional Science, 2(2): 80–105. Holzer, H.J. (2017), Building a new middle class in the knowledge economy, Psychosociological Issues in Human Resource Management, 5(2): 96–126. Jolliffe, I. T. (2002), Principal component analysis (2nd edition), Springer. Kassambara, A. (2017a), Practical guide to cluster analysis in R, STHDA Publishing House. Kassambara, A. (2017b), Practical guide to principal component methods in R, STHDA Publishing House. Law no.151/1998: http://www.cdep.ro/legislatie/eng/vol35eng.pdf., (accessed: 15 October 2018). Law no 314/2004: http://www.adrnordest.ro/user/file/library%20law%20ro%20and% 20en/Law %20No_%20315%20-%202004.pdf., (accessed 03 November 2018). Macháček, J. (2017), Promoting entrepreneurship on the part of municipalities, Administratie si Management Public, 29: 74–90. MacQueen, J.B. (1967),Some methods for classification and analysis of multivariate observations, Proceedings of 5-th Berkeley Symposium on Mathematical Statistics and Probability, Berkeley, University of California Press, 1:281–297. Nica, E. (2017), Foucault on Managerial Governmentality and Biopolitical Neoliberalism, Journal of Self-Governance and Management Economics, 5(1): 80–86. Ohanyan G. and Androniceanu, A. (2017), Evaluation of IMF program effects on employment in the EU, Acta Oeconomica, 67(3): 311–332. Oţil M., Părean, M. (2010), Macro-regional disparities in Romania, Annals of the University of Petroşani, Economics, 10(2): 255–266. Pavelková, D., Sopoligová, M., Bednář, P. (2017), Impact of cluster policies on structure and management of cluster organizations in Czechia and Slovakia, Administratie si Management Public, (29): 6–26. Pintilescu, C. (2011), Regional economic disparities in Romania, Recent Researches in Applied Economics-Proceedings of the 3rd World Multiconference on Applied Economics, Business and Development (AEBD’11), 1–5.

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Popescu Ljungholm, D. (2017), Global policy mechanisms, intergovernmental power politics, and democratic decision-making modes of transnational public administration, Geopolitics, History, and International Relations, 9(2):199–205. Rotaru, P. C. (2014), Empirical study on regional employment rate in Romania, Procedia-Social and Behavioural Sciences, 109: 1365–1369. Smékalová, L. (2018), Evaluating the cohesion policy: targeting of disadvantaged municipalities. Administratie si Management Public, 31: 143–154. Sroka W, Hittmár S., Kurowska-Pysz J. (2016) New trends in management and production engineering - regional, cross-border and global perspectives, Shaker Verlag, Aachen 2016. Şteliac, N. (2016), The labor market in Romania and interregional disparities, International Journal of Management Science and Business Administration, 2(6): 7–25. Thiel, A. (2017), The scope of polycentric governance analysis and resulting challenges, Journal of Self-Governance and Management Economics, 5(3): 52–82. Tcherneva, P.R. (2017), Money, power and distribution: implications for different monetary regimes, Journal of Self-Governance and Management Economics, 5(3): 7–27. http://statistici.insse.ro/shop/?page=tempo1&lang=ro, (accessed 10 October 2018). http://moradoconsulting.ro/regiunile-de-dezvoltare, (accessed 10 October 2018). (*)www.analizeeconomice.ro/2015/12/unde-se-traieste-mai-bine-in-romania.html, (accessed 10 October 2018). Armenia Androniceanu, PhD (in Economics), is Full Professor of Public Management and doctoral supervisor at the Bucharest University of Economic Studies, Romania and University of Messina, Italy. She is the founder and the general director of the International Center for Public Management and the Editor-in-Chief of the journal Administratie si Management Public. She focuses her research and publications on management of both private and public organizations. As a director, she has led numerous research projects based on partnerships with universities and other public and private sector organizations and international organizations such as the World Bank and the International Monetary Fund. She was the coordinator of the Public Policy Department of the Central Romanian Government Office where she coordinated a large and complex program of multi-sectoral structural reforms. She has published several books and articles in prestigious journals in Romania and abroad. Irina Alexandra Georgescu holds a PhD in Economics from Turku Centre for Computer Science, Åbo Akademi, Turku, Finland. Currently she lectures within the Department of Economic Informatics and Cybernetics at the Faculty of Cybernetics, Statistics and Economic Informatics at the Bucharest University of Economic Studies. Her research interests lie in the area of fuzzy sets and systems, computational intelligence and risk theory. She has published two books with Springer Verlag and about 50 journal papers on fuzzy choice functions and possibilistic risk theory.

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Olawale Isaac Wale-Awe

e-mail: [email protected] Ekiti State University, Department of Finance, Ado-Ekiti, Nigeria

Mergers and acquisitions in the banking sector: Lessons from Nigeria Abstract. It is a major business decision choosing whether to expand organically or through a merger. Mergers and acquisitions (M&As) are tools in business expansion and in getting out of business failure. It brings synergies that each separate firm may not access standing alone. Banking firms are, in many ways, different from other firms. They are highly regulated and can only merge horizontally. The merger experience in the banking sector in Nigeria in the last 14 years opened up seven different scenarios of interest. The crowd of 89 banks was reduced to 24: six stood without M&A; 69 merged to become 19 which were later reduced to 18; and 14 failed in the stampede. It was a dramatic period dotted with many grievous mistakes as banks scrabbled to meet regulator-induced recapitalisation-consolidation deadlines. Hence, post-merger failures were prevalent leading to further M&As in the sector. In the final analysis, the banks that stood alone are still standing whilst the merged banks keep failing. It can be inferred that banks have a better chance of survival with organic growth than with M&As. Key words: mergers and acquisitions; banks; regulators/supervisors

Introduction Mergers and acquisitions (M&As) are well accepted tools in business expansion and in getting out of business failure. M&As have become a natural and perhaps a desirable phenomenon in the current global economic environment. M&As have become a veritable tool for foreign direct investment inflow into various countries across the world. The main objective of the firm behind entering into an M&A deal is to work with other firms that can be more beneficial as compared to working alone in a market (Malik et al., 2014). The causes and consequences of mergers are issues extensively debated amongst both financial and industrial organization economists. Why do mergers actually occur? What are their effects on private profitability and public welfare?

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Which actions should be taken by policy makers, if any? These are all questions to which there are no agreed-upon answers. The aim of this paper is to review the existing theoretical and empirical literature on the causes and consequences of mergers. From this, light may be thrown also on their cyclical pattern. Many explanations have been supplied as to why mergers occur, over and beyond the neo-classical assumption of profit maximization. This issue is intertwined with that of post-merger profitability: if the merging partners are driven by profit maximization, then all mergers should be profitable. This, however, seems not to be the case (Mueller, 1980). Industrial economists have developed models that can assess the likely effects of mergers on economic welfare via its effects on market structure, and the conduct and the performance of market participants. Meschi (1999) posited that, ceteris paribus, a merger often results in the production of less output by the merged unit than was previously produced by the two independent merging partners. On the other hand, a merger is also bound to reduce costs by avoiding duplications of tasks and by leading to other efficiencies. Williamson (1968) was the first to underscore the existence of a trade-off between such cost efficiencies and the burdensome loss to welfare due to the decrease in industrial output and the consequent price rise. The history of M&As shows that they began in the United States back in the eighteenth century. In Europe, they commenced in the nineteenth century (Focarelli, Panetta and Salleo, 2002 cited by Malik et al., 2014). However, afterwards, developing nations started to follow the same pattern. Sufficient research on M&As has been done in the United States and Europe. Comparatively little research work had been done on M&As in developing countries like Pakistan, India, Malaysia, Bangladesh and Nigeria. The Oxford English Dictionary defines merger as the consolidation or combination of one firm or trading company with another. The French language calls it fusion. Fusion conveys the emergence of a new structure out of two old ones. An acquisition on the other hand, is a purchase. Largely, the terms are used interchangeably. But where one is negotiating, drafting legal documents, managing tax exposure, or reporting financial results, it pays to use the appropriate words (Bruner 2004). A merger can be defined as the combination of two or more firms into one new firm or corporation (Roberts et al., 2010). A merger is further segregated into statutory merger, subsidiary merger and a takeover. In a statutory merger, the target firm ceases to exist, whereas in a subsidiary merger the target firm exists as a subsidiary of the acquirer. In a consolidation, the acquirer and target firms are dissolved and a new firm emerges. The term takeover is used to describe a situation where the merger is hostile (Gaughan, 2007). In an acquisition, according to Georgios and Georgios (2011), a big and financially sound firm purchases a small firm.

O.I. Wale-Awe: Mergers and acquisitions in the banking sector: Lessons from Nigeria

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In acquisition, one firm purchases a part or the whole of another firm (Malik et al., 2014). Yet the terms mergers and acquisitions are used interchangeably in everyday business parlance. Thus, Roa and Kumar (2013) define M&As as activities involving takeovers, corporate restructuring, or corporate control that changes the ownership structure of firms. Thus, both mergers and acquisitions are in the market for corporate control. According to Malik et al. (2014), the main objective of every firm is to get maximum attainable profits in order to increase the wealth of shareholders and to afford to give them high dividends on a continuous basis. Every firm adopts different techniques and tools to maximize its profit in a bid to survive in the fast-growing market. There exist certain events for which every firm has to respond spontaneously in order to get maximum gains, like entering into new markets, launching new products, increasing its portfolio, etc. The firms then require financial resources to achieve their objectives as quickly as possible to enjoy a certain monopoly in the market. These events and transactions create a huge amount of problems for those firms that lack or fail to arrange finance to meet the requirements of the growing market. The smaller or less profitable firms are left with no option except to quit the market or merge with or be acquired by financially sound firms. M&As become the only option for small or less profitable firms to survive and thrive in the emerging market. M&A is a global business strategy that enables firms to enter into new potential markets or into new business areas. Some research works on M&A in the Nigerian banking sector are appropriate at this point. Okpanachi (2011) used gross earnings, profit after tax and net assets as indices to determine financial efficiency. The financial statements of three banks pre- and post-merger were analysed and findings revealed that the post-merger period was more efficient than the pre-merger period. Onikoyi (2012) took two consolidated banks as case studies and their financial statements pre- and post-merger were obtained, adjusted, analysed and compared, and evaluated. Findings revealed that operational and relational synergies in addition to financial gains were evident in the post-merger period. Adaramola and Oluwagbuyi (2014) investigated the synergistic effects of bank mergers in Nigeria and observed that only one out of three merger groups showed evidence of synergy in the growth of shareholders’ funds while none showed synergy in the growth of total assets. They concluded that not all mergers and acquisitions in Nigeria result in true financial synergy. Yusuf and Sheidu (2015) analysed the Return on Equity (ROE) of the 89 banks pre-merger and the 24 banks post-merger using Chow Structural Break tests, Paired Sample t-statistics and Independent Sample t-statistics on the mean ROEs of the banks. The results showed that M&As do not improve

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the ROE ratios of the banks involved. This was inconsistent with the pre-merger optimistic expectations. The study therefore concludes that there was insignificant or no improvement in each bank’s financial performance following consolidation. Njogo et al. (2016) used nine variables to test the financial statements of 10 banks from 2001 to 2010, covering the pre- and post-merger periods. The variables were Return on Assets (ROA), Return on Equity (ROE), Net Profit Margin (NPM), Asset Utilisation (AU), Equity Multiplier (EM), Earnings per Share (EPS), Debt Equity Ratio (DER), Debt Asset Ratio (DAR) and Leverage Ratio (LR). Findings showed that there was significant difference in the performance of banks post-merger using ROA, ROE, and LR as yardsticks, but there were no significant impacts on the performance of banks using the other six variables as yardsticks. Odeleye (2014), using Chow test and System GMM (generalized methods of moments) estimation to measure stability and using earnings per share as a proxy for consolidation, examined the effect of consolidation on performance for the 1999–2011 period and concluded that Nigerian banking consolidation exercise did influence their efficiency positively.

1. Legal framework for M&As in Nigeria The laws that regulate M&A activity in Nigeria are the Investment & Securities Act (ISA), the Companies and Allied Matters Act (CAMA) and the Rules and Regulations of the SEC (Securities & Exchange Commission) made pursuant to the ISA. The Listing Requirements of the Nigerian Stock Exchange (NSE) also contain provisions that have an impact on M&A transactions. Additionally, there are sector-specific laws that add to the M&A regulatory requirements for the sectors they apply to. The Banks and Other Financial Institutions Act (BOFIA) and the CBN (Central Bank of Nigeria) Guidelines and Incentives on Consolidation in the Banking Industry are relevant to M&As in the banking sector; the Nigerian Communications Act regulates the telecommunications sector; and the National Insurance Commission Act regulates the insurance industry. Pursuant to Section 118(4) of the ISA, the SEC’s approval will still be required even where the approval of the sector regulator has been obtained. The Companies Income Tax Act also requires the consent of the Federal Inland Revenue Service to a proposed M&A in relation to the capital gains tax payable. Common law will apply to the extent that there is no relevant provision in statute.


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The SEC Rules and Regulations were amended in March 2010. The amendments appear to be aimed at improving corporate governance in public companies and aligning the rules with the ISA, which repealed the Investment and Securities Act 1999. With respect to the rules governing M&A, the new rules provide that the lower threshold for merger reporting will be ₦250 million. This reduces by 50 per cent the ₦500 million provided as the lower threshold in Section 120(4) of the ISA. The prescription of the thresholds in the ISA 2007 was a transitional provision, which expired when the SEC prescribed the relevant thresholds in the new rules. In accordance with the ISA, mergers of a value below the lower threshold are small mergers and do not require prior notification to the SEC. However, the new rules require that the SEC be informed of small mergers at the conclusion of the merger. They also contain provisions on how the turnover and assets of merging entities should be calculated. The rules also provide that the executive directors of market operators must be approved by the Commission prior to their appointment. The SEC also issued a Code of Corporate Governance for public companies. Nigeria does not have a competition (or antitrust) law but industry regulatory authorities are generally given the power to refuse to grant consent to mergers if they are satisfied that competition in the sector will be significantly reduced as a result. Thus, the SEC will not approve a merger if it is satisfied that it will substantially lessen competition in the relevant sector.

2. Regulatory intervention to strengthen banks in Nigeria The Nigerian banking industry has witnessed sundry vicissitudes over its short span from 1872 when the first banking firm, the African Banking Corporation, was established. According to Ekundare (1973), the Bank of British West Africa (BBWA), a subsidiary of the Standard Bank in the UK, followed in 1894. The Bank of Nigeria, established in 1899, was later acquired by BBWA in 1912. Thereafter, the West African Currency Board was established as an agent of BBWA. Ekundare (1973) explained that Barclays Bank came to Nigeria in 1917. The National Bank of Nigeria came on board in 1933 and the African Continental Bank and Agbonmagbe Bank came in 1945. Subsequently, there was the Industrial & Commercial Bank (1929), the Nigerian Mercantile Bank (1931) and the Anglo-African Bank (1901), but they all failed within a few years of operation (Ekundare, 1973).

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The African Development Bank, the Rural Banking Scheme, the Peoples’ Bank and Community Banks (which later became Micro Finance Banks) were established in 1948, 1977, 1989 and 1990 respectively as government initiatives. Within this period, there were many private commercial banks that opened, some of which merged while some failed, and Agbonmagbe Bank became Wema Bank. The formal banking sector by the mid-1980s had been largely static. The banking system was characterised by low capital base, high non-performing loans, insolvency, illiquidity, over dependence on public sector deposits and foreign exchange trading, poor asset quality, weak corporate governance and low depositors’ confidence. The banking sector could not support the real sector of the economy at 25% of GDP compared to the African average of 78% and 272% for developed countries (Ebong, 2006). However, by 2004, there were 89 banks in Nigeria: these were called legacy banks because they merged to give rise to bigger banks. The Central Bank of Nigeria (CBN) observed that the banks were weak and failing because of their low capital base. At the same period in time, the smallest bank in Malaysia had $526 million as a capital base while the largest in Nigeria had $240 million as a capital base (Soludo, 2004). According to Soludo (2004), one bank in South Africa had assets that exceeded that of the 89 banks in Nigeria; and in Singapore, the second largest bank had a capital base of $67 billion. Thus, the CBN ruled that the banks should increase their capital base to ₦25 billion and they were allowed to merge and raise funds through the capital market to meet the mandate. At the end of the consolidation, six banks were able to achieve the ₦25 billion target without merging, 69 banks merged to become 19 banks and 14 banks failed (Njogo et al., 2016). Thus, the 89 banks reduced to 25 banks, as shown in the table below. Table 1. Number of banks emerging after consolidation Before Consolidation

After Consolidation

Banks that survived without merging

06

06

Banks that merged to survive

69

19

Banks that failed

14

-

TOTAL

89

25

According to Osisioma et al. (2015), the banks were classified by CBN into four groups based on their paid-up capital: International (₦50bn), National (₦25bn), Regional (₦10bn) and Distressed (below ₦10bn). Thus, there were nine, five, two and eight banks in the international, national, regional and distressed categories respectively, as the table below elucidates. This, again in 2009, forced the banks to start another fight for survival. It was like a blue ocean (Kim and Mauborgne, 2004) turned red.


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Table 2. Categorisation of Nigerian banks in 2009 S/N

International

National

Regional

Distressed

1

Access

Ecobank

Wema

Afribank

2

Diamond

NIB (citibank)

Unity

Bank PHB

3

FCMB

Stanbic/IBTC

Equitorial Trust

4

Fidelity

Standard Chartered

Finbank

5

FBN

Sterling

Intercontinental

6

GTB

Oceanic

7

Skye

Spring

8

UBA

Union

9

Zenith

Source: Njogo et al., 2016.

In August 2009, the CBN had injected ₦620 billion into eight distressed banks in order to recapitalise them and restore confidence in their operations (Oghojafor, Olayemi, Okonji, & Okolie, 2010; www.thisdaylive, 2018). The regional banks later waded through the storm and reconsolidated to climb into the national category.

3. Recent banks’ M&A experience in Nigeria The six banks that consolidated with recapitalisation (and without M&A) are Citibank, GTB, Standard Chartered, Stanbic, Zenith and Ecobank. These banks, call them the titans, waded through the storm of the 2000–2010 decade and are still in operation today. They tend to prove that organic growth is better than M&A. The merger of the 69 banks that became 19 banks, were of various forms (see the Appendix). Some were mergers while others were acquisitions. Some of the mergers were among presumed equals, in which case they adopted new names. In cases where mergers resulted in the adoption of the name of the dominant bank, then it is technically classified an acquisition. On this basis, there were three merger models and four acquisition models, as shown in Figure 1.

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Figure 1. Models of banks’ M&A scenarios in Nigeria from 2000

Merger of two banks Merger of many banks Merging with the merged ��isi�on of one bank ��isi�on of many banks ��isi�on of on an ��irer ��isi�on of Merged Bank


Merger of two banks: the only merger of two banks was between Habib and Platinum. The product, called Bank PHB, did not last long before it failed. Habib



Bank PHB

Platinum

Merger of many banks: there are two scenarios under this heading. One is where the new name is a combination of the names of some of the dominant banks in the amalgamation (IBTC-Chartered, UBA) and the other is where a completely new name is adopted (Skye, Unity, Union, Spring). In the merger that produced UBA, Standard Trust had the technology while UBA had the branch network and the joint firm adopted the name UBA and kept the logo of Standard Trust. Springbank later became distressed and was bought and transformed into Enterprise bank and later Heritage Bank.


Bond

BoN Tropical

Reliance

Coop

Skye

Societe Societe

Centre Point

Unity

Interestate

Intercity

Pacific

EIB

Prudent

63

New Nig

NAMB

Merging with the merged: IBTC-Charetered resulted from a merger but it did not last for more than three years before it started having survival problems. It later merged with Stanbic (one of the six titans). The supra-union birthed Stanbic-IBTC.

IBTC

CBL Regent

Stanbic

+

IBTC Chartered

=

StanbicIBTC

IBTC-Chartered

Acquisition of one bank: Wema Bank acquired National Bank. Both banks were first generation banks that were established before independence (1960). Wema Bank Plc later had problems but it weathered the storm, under the leadership of an astute CEO. Acquisition of many banks: There were cases of acquisitions where the acquirer bought many banks. Those concerned were Access, Diamond, FCMB, and Fidelity. FCMB Coop Dev

Midas

NAB

Acquisition of an acquirer: these are cases where an acquirer is later acquired. There were three such scenarios: Intercontinental Bank, Equitorial Trust Bank and Oceanic Bank were absorbed into Access Bank, Sterling Bank and Ecobank respectively, in 2012.

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Second degree acquirer

Acquirer now acquired

Access

Intercontinental

Sterling

Equitorial Trust

Ecobank

Oceanic

Sterling

Ecobank

Equitorial

Oceanic

Devcom

ITB

Accses Bank

Intercon�nental Equity

Global

Gateway

Acquisition of merged banks: another scenario is where a merged bank acquires another merged bank. The two occurrences of this scenario were the acquisition of Afribank by Skye Bank and the acquisition of Finland Bank by FCMB in 2012.

Conclusions The overall growth a bank achieves directly correlates with seven characteristics. These are: strong revenue growth; significant market share or strong niche position; a market with barriers to entry by competitors; a strong management team; strong, stable cash flow; no significant concentration in customers, products, suppliers, or geographic markets; and low risk of technological obsolescence or product substitution. In the theory of M&As, the synergy value that is expected to accrue to the joint entity encompasses all seven components thus stated (Sherman & Hart, 2006). But this was not the case with the M&As that took place following the consolidation-recapitalisation directive from the Central Bank of Nigeria. The six banks (titans) that stood without merging are still standing today, whilst many that went through a series of M&As failed. A case worthy of special reference is Skye Bank Plc that was taken over by the regulators in September 2018 and a bridge bank, Polaris Bank Limited, was created to continue its existence.


65

The question that readily comes to mind at this point is: what variables should a bank consider in striking the right balance between organic growth (build) in contradistinction to M&A (buy)? These include the competitiveness, fragmentation and pace of the marketplace and industry; the access to and cost of capital; the specific capabilities of management and advisory teams; the strength and growth potential of current core competencies; the volatility and loyalty of distribution channels and customer base; the degree to which speed to market and scale are critical in the bank (including typical customer acquisition costs and timeframes); and the degree to which a bank operates in a regulated industry (Sherman & Hart, 2006). For example, the bite that Skye Bank could not swallow was the acquisition of Mainstreet Bank (formerly Afribank) in 2014, a transaction financed with an all-cash compensation. Had Skye Bank not acquired Afribank, it would not have collapsed. This chapter has surveyed the theoretical and empirical literature on the causes and consequences of M&As. The body of empirical evidence on the performance of M&As shows that they are not always privately profitable. It is often the case that the shareholders of the acquiring company lose out, as the value of their stock holdings decreases post-merger. Moreover, the acquired company is most likely to experience a decline in profitability, market share or productivity. Only the shareholders of the acquired company gain substantial returns from mergers, and this only if the bid is not contested. However, in the case of bank mergers, the acquired banks cease operations, and their branch buildings and other assets are converted into that of the new bank. Thus, there is no acquired entity post-merger, and the end result is that nobody gains.

References Adaramola, A.O., Oluwagbuyi, L.O. (2014), Synergistic effect of recent merger and acquisitions in Nigerian banking industry, Developing Country Studies, 4(8): 45–52. Bruner, R.F. (2004), Applied mergers and acquisitions, New York: John Wiley & Sons. Ebong, B.B. (2006), Banking sector reforms: opportunities and challenges, Union Digest, 10(12): 1–13. Ekundare, R.O. (1973), An economic history of Nigeria 1860–1960, London: Methuen & Co Ltd. Gaughan, P.A. (2007), Mergers, acquisitions, and corporate restructurings, New York: John Wiley & Sons. Georgios, K., Georgios, H. (2011), Du Pont analysis of a bank merger and acquisition between Laiki Bank from Cyprus and Marfin Investment Group from Greece:

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Is there an increase of profitability of the new bank? Kyriazopoulos-Hadjimanolis, MIBES: 157–176. Kim, W.C., Mauborgne, R. (2004), Blue ocean strategy, Boston: Harvard Business University Press. Malik, M.F., Anuar, M.A., Khan, S., Khan, F. (2014), Mergers and acquisitions: a conceptual review, International Journal of Accounting and Financial Reporting, 4(2): 520–533. Meschi, M. (1999), Analytical perspectives on mergers and acquisitions: a survey, Centre for International Business Studies, South Bank University, London. Mueller, D.C. (ed.) (1980), The determinants and effects of mergers: an international comparison, Cambridge: Oelgeschlager, Gunn and Hain. Njogo, B.O., Ayanwale, S., Nwankwo E. (2016), Impact of mergers and acquisitions on the performance of deposit money banks in Nigeria, European Journal of Accounting, Auditing and Finance Research, 4(4): 1–17. Odeleye, A.T. (2014), Pre-consolidation and post-consolidation of Nigerian banking sector: a dynamic comparison, International Journal of Economics and Financial Issues, 4(1): 27–34. Oghojafor, B.E.A., Olayemi, O.O., Okonji, P.S., Okolie, J.U. (2010), Poor corporate governance and its consequences on the Nigerian banking sector, Serbian Journal of Management, 5(2): 243–250. Okpanachi, J. (2011), Comparative analysis of the impact of mergers and acquisitions on financial efficiency of banks in Nigeria, Journal of Accounting and Taxation, 3(1): 1–7. Onikoyi, I.A. (2012), Merger and acquisitions and banks performance in Nigeria, Jorind, 10(2): 338–347. Osisioma, C.B., Egbunike, A.P., Adeaga, J.C. (2015), Investigating the impact of corporate governance on banks’ performance in Nigeria: a field experiment, International Journal of Economics and Business Administration, 1(2): 98–112. Roa, S.D., Kumar, R.P. (2013), Financial performance evaluation of Indian commercial banks during before and after mergers, Referred Journal of CMR College of Engineering & Technology, 2(1):117–129. Roberts, A., Wallace, W., Moles, P (2010), Mergers and acquisitions, Edinburgh Business School, Heriot-Watt University. Sherman, A.J., Hart, M.A. (2006), Mergers and acquisitions from A to Z, New York; American Management Association. Soludo, C.C. (2004), Consolidating the Nigerian banking industry to meet the development challenges of the 21st century, Being an address delivered to the Special Meeting of the Bankers Committee, held on July (Vol. 6). ThisDay (2018), available at: www.thisdaylive.com/index.hph/2018/10/18/skyebank-failure-and-matters-arising/?amp, (accessed 30 October 2018). Williamson, O.E. (1968), Economies as an anti-trust defence: the welfare trade-off, American Economic Review, 58: 18–36. Yusuf, H., Sheidu, A.D. (2015), Mergers and acquisitions in the banking sector and implications for return on equity (ROE): evidence from Nigeria, International Journal of Business and Social Science, 6(9): 184–191.


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Olawale Isaac Wale-Awe has a BSc in Economics (1984), PGD in Computer Science (1986), MSc in Banking & Finance (2006), ACA (1989), FCA (2000). He was a lecturer in the Department of Accounting, as well as HOD and Sub-Dean of Faculty, Ekiti State University, Nigeria (1996–2008). He was Director of Examinations, then Director of Student Affairs and later Director Membership Affairs at the Institute of Chartered Accountants of Nigeria (2008–2016). He embarked on a full-time PhD programme in the Ekiti State University in 2016, and his dissertation is ready for submission. He consults for Sage Education Limited and had written five books and published many articles.

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69

Chapter 2.

Management of the company 1. Jarmila Šebestová, Žaneta Rylková, Petra Krejčí, Monika Lejková: Different strategic goals in the same business environment: Competent entrepreneurs or just luck? 2. Anna Bazan-Bulanda: Agile PM: The possibility of using Timeboxes in projects implemented as public orders 3. Iwona Gawron, Sławomir Ziółkowski: The role of trust in a knowledge-based economy 4. Dalibor Šimek, Roman Šperka: Business process management implementation: The literature review and framework proposal for low process mature companies 5. Grzegorz Kunikowski, George Nezlek, Christian Trefftz: Voronoi diagram modeling for defining developing energy markets

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Chapter 2. Management of the company

71

Jarmila Šebestová


Žaneta Rylková


Petra Krejčí


Monika Lejková

e-mail: [email protected] Silesian University in Opava, School of Business Administration in Karvina, Czech Republic

Different strategic goals in the same business environment: Competent entrepreneurs or just luck? Abstract. Entrepreneurial competencies and satisfaction with current business are closely linked together. Their relationship affects not only the final success in business, but also their development. This was supported by a literature review. The aim of this chapter is to explain how competencies are important in the period of growth. the results of the field study are presented in the form of three scenarios, with more than 60% of variance explained. The results are based on the results of an empirical study (210 respondents) in the Czech Republic. Moreover, the study concludes that the competence basis in businesses must be internally strong to meet external challenges and changes successfully in the future. Key words: business; business environment; competencies; success; failure

Introduction Entrepreneurs reflect current modern trends, which are more dynamic, especially in the small and medium enterprise (SME) sector. In opposition to that, entrepreneurial competencies are considered to be linked to personality traits, skills and knowledge, and therefore can be connected with an ability of the entrepreneur to be successful. In particular, Man et al. (2002) distinguished six major areas such as opportunity, relationship, conceptual, organizing, strategic, and commitment competencies. The individual level

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of those competencies can affect an individual business environment evaluation by level of satisfaction. All characteristics have long-term effects and they have closer links to organizational performance within current business environment. Competent entrepreneurs in the long term seem to be a more important issue in terms of quality assessment rather than directly providing them with more resources. In this chapter, after introducing the concept of business environment quality assessment at the company level, a competency approach will be explained. A research question has arisen about how entrepreneurial satisfaction with business environment quality and competencies could affect future reaction. The analysis consists of three constructs, namely entrepreneurial competencies, level of satisfaction with business environment quality within the business life cycle as a third component. The main goal of the chapter is to model areas that link different competency areas with factors from the business environment, which lead to business success. This study is based on the results of a field survey among 210 companies in the Czech Republic

1. Literature review Active support of entrepreneurial competencies goes hand in hand with business success (Bacigalupo et al., 2016; Komarkova et al., 2015; Pilková et al., 2016). Support of entrepreneurial competencies and their satisfaction with business environment quality seems to be desirable on a national or regional level to enhance development of entrepreneurship and growth of business environment quality (Fayolle et al., 2006; Von Graevenitz et al., 2010; Šebestová, 2016; Šebestová and Rylková, 2011; Weber, 2011; Ahmad et al., 2010). The economic activity of business units in the regional context seems to be an important indicator for the evaluation of the effectiveness of regional policy. The stability of regional growth attracts new investors and new startups, which could drive the chosen region toward value added growth and welfare growth in the regional society (Malikov et al., 2015). Business activity is closely connected with a suitable regional policy model and business models (Ács et al., 2014; Dvouletý, 2017). In contrast to this, Delfman and Koster (2012) stated that the economic impact of new start-ups on regional growth is impossible to quantify due to the diversity of the urban and rural areas of a region, so the importance of the municipal policy in promoting entrepreneurship therefore increases. They also commented that businesses operating

J. Šebestová, Ž. Rylková, P. Krejčí, M. Lejková: Different strategic goals in the same...

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in depopulating regions cause an indirect effect in terms of labour productivity and innovation growth at the point when they are between eight and ten years from start up. Domestic studies (Zich, 2010; Syrovátková and Verl, 2011; Školudová, 2015; Zapletalová et al., 2015; Mandysová; 2016) have shown that regions across Czech Republic have much the same problems – small- and medium-sized companies are getting older, are less connected with public governmental bodies, do not make much use of the publicly available business support and are linked with regional business support (Lukeš et al., 2013). An active business policy presents a development of competent entrepreneurs over long-term time frame and it seems to be an important issue for sustainability and active business support. The previous studies have shown that entrepreneurs are capable of minimising the negative impact of the business environment when they develop their competencies (Dvouletý, 2017; Greblikaite et al., 2016).

1.1. Satisfaction with business environment Some previous studies show that the environment has a significant direct effect or a moderating effect on business success (Entrialgo et al., 2001; Dvouletý, 2017; Pilková et al., 2016), while others have found a weak tie with that issue (Jogaratnam, 2002). On the other hand, the business environment could bring opportunities for entrepreneurs and it makes an important contribution to decision making about product placement, place of business and other issues. In line with that, Markman (2007) argues that entrepreneurs are those who possess the knowledge, skills, and abilities to be strategic leaders for their ventures, whereby their actions influence the ventures’ success. Based on that content, a skilled entrepreneur is one who can manage the environmental challenges. This study attempts to test a model that places prime responsibility for business success on the competencies of the entrepreneur. 1.2. Entrepreneurial competencies The definition of entrepreneurial competencies and the stress on the development of entrepreneurial literacy can be found in the “Green Paper on Entrepreneurship” (EU Commission, 2003). This agenda was updated by the “Small Business Act”, published in 2008, when eight basic competencies

74


were identified in a focus on knowledge economy building. The “New skills agenda for Europe 2020” is just going to be implemented in entrepreneurial education. The origin of the competence model is the EntreComp Competence Model (Bacigalupo et al., 2016), where the main stress is put on the resources for the business and their optimization. Propositions related to these relationships are presented by a conceptual framework which is able to incorporate findings from previous studies and the current results from this empirical study (Figure 1). Figure 1. Conceptual framework for environment and competencies

Personality

Business Success

Competencies

Entepreneurial Rea��on (Goals, Strategy, �o��a�on� Business Environment

Sa�sfac�on

Business Failure


As can be seen from Figure 1, there are two input variables, namely satisfaction and competence. A business environment has a direct influence on satisfaction of entrepreneur, indirect tie could be seen on competencies. On the other hand, the entrepreneur affects the competence himself. This framework indicates the relationship between competencies and satisfaction and how they can interact with each other. Both variables affect the entrepreneur’s reaction, business development and final business result in the form of success or failure. This was a reason for the research question: Does the relationship between the number of factors of competence and environmental factors differ? An empirical study was conducted to achieve sophisticated results.

2. Methodology and data The primary quantitative research amongst the business population in the Czech Republic was used to obtain relevant data. The aim of the questionnaire survey was to identify important factors which cause barriers in doing business and which competencies would be useful for sustainable business.


75

Data collection started in February 2017 and continued to April 2017 in the form of an electronic questionnaire. An omnibus survey was used to obtain relevant quantitative data from the entrepreneurial population by stratified sample use. The response rate was 70%; 300 respondents obtained the questionnaire and the sample for final evaluation consisted of 210 responses. A representative sample was obtained at a confidence level of 95% with a 5% margin of error (within the total business population in the Czech Republic). Most companies in the sample were carrying out business in industry, namely 46%: 27% in services, 21% in trade (wholesale, retail) and 6% in agriculture. The number of small businesses, namely enterprises employing up to 50 employees, that took part amounted to 58%, where enterprises employing up to 10 employees amounted to 20% and enterprises employing 11–49 employees 38%. Medium-sized enterprises (between 50 and 250 employees) were represented in 30% of cases and large companies (250+ employees) had their share at 12%. More than 75.2% of the companies in the sample were in the growth phase, as opposed to 24.8% of the companies in crisis and decline in the last three years. Most of the companies had been operating on the market for more than 10 years, so there was an assumption of business experience (Figure 2). Figure 2. Structure of the sample by age of company more than 25 years 8%

less than 3 years 8%

4 to 10 years 18% 16 to 25 years 48%

11 to 15 years 18%


To be able to evaluate the previously mentioned research question, the results from one part of the questionnaire are presented. All factors were evaluated by respondents on a Likert scale of 1 to 5 (where 1 = not connected with me and my business and 5 = I am dealing with that factor in everyday life). There are five competencies (CP) and five environmental factors (ENV) presented and evaluated:

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–– Competencies (CP) 1. Localization in the region (LOCAL) – evaluation of business place (their choice); 2. Payment behaviour of customers (PAY_BEH) – level of financial management, relationship development; 3. Quality of workforce (WORK) – clarity of workplace description, placement of employees; 4. Tradition (TRAD) – an influence of business tradition in their family; 5. Transport accessibility (TRANS) – knowledge of logistics issues, competence for solving transportation problems. –– Environmental Factors (ENV) 1. Lack of alternative sources of financing such as loans, micro-loans, etc., ALT_FIN; 2. Legislation, condition for business in general (LEGIS); 3. Previous industrial activity in the region, eg. Brownfields, (PREV_ACT) (Tureckova et. al., 2017); 4. Public administration, bureaucracy (BUREAU); 5. State / regional subsidy policy (SUPPORT). To get sophisticated results, a factor analysis was used. All data were tested for reliability and the Kaiser-Meyer-Olkin test (KMO) was above 0.6. To get the principal components, rotation Varimax was used. Three scenarios were tested in relationship with the business cycle.

3. Empirical results In the first step, a basic comparison of ten selected factors was applied. As had been mentioned, results were sorted according to business cycle, when growth is significant in terms of success and stagnation and crisis is closely connected with business problems and possible failure. In Table 1, a comparison is made, when the maximum difference in successful companies is in factor legislation (LEGIS) and locality (LOCAL). In opposition to that, in companies with problems, there is a difference not only in localization, but in the influence of tradition (TRAD) and previous activities in the region (PREV_ACT).


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Table 1. Evaluation of factors based on mean score Overall Success Stage Std. Std. Deviation Mean Mean Type Variable Deviation Deviation to overall E A B C D (A-C) CP LOCAL 3.319 1.369 3.152 0.113 0.167 CP TRANS 3.076 1.284 2.968 0.105 0.108 CP WORK 3.876 1.247 3.835 0.1 0.041 CP TRAD 2.3 1.345 2.171 0.105 0.129 CP PAY_BEH 3.343 1.466 3.297 0.115 0.046 ENV LEGIS 3.1 1.361 3.247 0.103 -0.147 ENV BUREAU 2.814 1.221 2.905 0.089 -0.091 ENV SUPPORT 2.181 1.243 2.241 0.102 -0.06 ENV PREV_ACT 1.786 1.038 1.671 0.073 0.115 ENV ALT_FIN 2.157 1.241 2.114 0.099 0.043

Failure Std. Deviation Mean Deviation to overall H F G (A-F) 3.827 0.139 -0.508 3.404 0.146 -0.328 4 0.164 -0.124 2.692 0.182 -0.392 3.481 0.206 -0.138 2.654 0.198 0.446 2.538 0.197 0.276 2 0.15 0.181 2.135 0.173 -0.349 2.288 0.165 -0.131

Source: own research.

Secondly, scenario one was prepared. Business cycle was used as the independent variable to get overall factors for the whole sample (total variance explained 66,741%, sig. 000) Five factors were extracted, and three of them had more than 50% variance explained (Table 2). Table 2. Scenario 1: Overall factor analysis Rotated Component Matrix Type

Variable

F1

F2

F3

ENV

BUREAU

.826

ENV

LEGIS

.754

ENV

ALT_FIN

.714

CP

TRANS

.853

CP

LOCAL

.628

ENV

PREV_ACT

.782

CP

TRAD

.682

F4

CP

WORK

.832

CP

PAY_BEH

.661

ENV

SUPPORT

F5

.794

Source: own research; extraction method: Principal Component Analysis; rotation method: Varimax with Kaiser normalization.

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As was mentioned, only three factors were shown to be the most important. Political environment (F1) consists of three environmental variables; Placement of business (F2) describes the relationship between two competency variables – transport and location. Finally, Historical Roots (F3) represents a combination of environmental factors and competency task. This scenario has shown that environmental issues take first place for business success and they have deep links to business decision-making, as was mentioned in Dvouletý’s (2017), Pilková et al.’s (2016) and Šebestová’s (2016) research findings. Growing companies: Scenario two. The dependent variable was business cycle (growth stage). The same number of factors was extracted, and four main factors explained 58.85% of variables (total variance of five factors was 68.3%). Results are presented below (Table 3). Factors obtained sub index “s” to indicate success position of the business. There are four environmental and five competency variables extracted. Table 3. Scenario 2: Factor analysis for growing companies (s) Rotated Component Matrix Type

Variable

F1s

ENV

BUREAU

.824

F2s

F3s

F4s

ENV

LEGIS

.786

ENV

ALT_FIN

.665

CP

TRAD

.779

ENV

SUPPORT

.677

CP

PAY_BEH

CP

TRANS

.856

CP

LOCAL

.788

CP

WORK

F5s

-.660

.931


Similarity can be seen in the first factor Political environment, when the structure of the factor is the same as the overall results (F1=F1s). In contrast to the overall results, “Placement of Business” is the last factor (F2=F4s). A significant point in that analysis could be seen in factors F2s and F3s, which demonstrate different behaviour of growing and successful businesses. The factor “Supporting background” (F2s) illustrates an interaction between traditions and supporting policy in the region. The last factor, which is highlighted is payment conditions as a negative factor for success (F3s). It wasn’t founded on any connection with previous activities (PREV_ACT).


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Companies in stagnation, crisis: Scenario three. The dependent variable was business cycle (stagnation, crisis). The same number of factors was extracted, and three main factors explained 52.25% of the variables (total variance 66.13%; sig. 000). The behavior of those companies is so different from the overall model. There is no connection with the basic factor set from scenario 1 (compare Table 2 and Table 4). The variable of alternative sources for financing is totally missing (ALT_FIN). There are four environmental and five competency variables extracted also. Table 4. Scenario 3: Factor analysis for companies in failure Rotated Component Matrix Type

Variable

F1f

CP

PAY_BEH

.821

F2f

CP

LOCAL

-.802

ENV

PREV_ACT

.689

ENV

BUREAU

.904

ENV

LEGIS

.745

F3f

F4f

F5f

CP

TRANS

ENV

SUPPORT

.849

CP

WORK

.805

CP

TRAD

-.760

.929


This scenario illustrates stress on competency models and the economic literacy of business entities to get money for their development (F1f) and their dependence on support in fourth place (F4f). The presented scenarios support the research question about the difference of behavior of businesses according to their business cycle. It seems that competencies are more used in the case of problems, when satisfaction affects development and risk-taking in the growing phase.

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Conclusions There is often a problem, especially in SMEs, that they have poor competencies to reflect their current cycle and solve business problems. This study shows that examples of specific competencies studied at a detailed level in Czech companies are still quite scarce in the literature. The number of companies in the Czech Republic is increasing, but it has still not been possible to specify in detail the assets that are the basis for creating financial success, because the results of factor analysis are very limited, dependent on the sample and current situation of respondents. The main results have shown that success and growth is dependent on current satisfaction with the business environment. Business organisations need to take care of their competencies to avoid competence traps, which are important to business survival. Acknowledgements This work was supported by the Silesian University in Opava, by the Student Grant System SGS/06/2018 “Economic Literacy of Business Entities”.

References Ahmad, N.H.T., Ramayah, C. Wilson, Kummerow L. (2010), Is entrepreneurial competency and business success relationship contingent upon business environment?: a study of Malaysian SMEs, International Journal of Entrepreneurial Behavior & Research, 16(3): 182–203. Ács, Z., Autio, E., László, S. (2014), National systems of entrepreneurship: measurement issues and policy implications, Research Policy, 3(43): 476–494. Bacigalupo, M., Kampylis, P., Punie, Y., Van den Brande, G. (2016), EntreComp: the entrepreneur-ship competence framework, Luxembourg: Publication Office of the European Union. Delfmann, H., Sierdjan K. (2012), New business creation and its effect on employment growth in regions facing population decline, available at: http://www-sre. wu.ac.at/ersa/ersaconfs/ersa14/e140826aFinal01133.pdf, (accessed 20 December 2017). Dvouletý, O. (2017), Can policy makers count with positive impact of entrepreneurship on economic development of the Czech regions? Journal of Entrepreneurship in Emerging Economies, 9(30: 286–299). Dvouletý, O. (2017), Determinants of Nordic entrepreneurship, Journal of Small Business and Enterprise Development, 24(1): 12–33.


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Entrialgo, M., Fernandez, E., Vazquez, C.J. (2001), The effect of the organizational context on SME’s entrepreneurship: some Spanish evidence, Small Business Economics, 16(3): 223–236. Fayolle, A., Gailly, B., Lassas-Clerc, N (2006), Assessing the impact of entrepreneurship education programmes: a new methodology, Journal of European Industrial Training, 30(9): 701–720. Greblikaite, J., Sroka, W., Gerulaitiene, N., (2016), Involving young people in Polish and Lithuanian social enterprises by fostering entrepreneurial skills and abilities as entrepreneurial opportunity at university, Entrepreneurial Business and Economics Review, 4(3): 131–152. Jogaratnam, G. (2002), Entrepreneurial orientation and environmental hostility: an assessment of small independent restaurant businesses, Journal of Hospitality & Tourism Research, 26(3): 258–277. Komarkova, I., Conrads, J., Collado, A. (2015), Entrepreneurship competence: an overview of existing concepts, policies and initiatives, In-depth case study report, JRC Technical Reports, Luxembourg: Publications Office of the European Union. Lukeš, M., Zouhar, J., Jakl, M., Očko, P. (2013), Faktory ovlivňující vstup do podnikání: začínající podnikatelé v České republice, Politická Ekonomie, 2: 229–247. Malikov, R., Sharipova, I., Kharisov, V., Sunaeva, G., Mukhametova, D. (2015), Development of assessment tools for economic activity of regional business, Mediterranean Journal of Social Sciences, 6(5): S2, 434–444. Man, T.W.Y., Lau, T., Chan, K.F. (2002), The competitiveness of small and medium enterprises. a conceptualisation with focus on entrepreneurial competencies, Journal of Business Venturing, 17(2): 123–142. Mandysová, I. (2016), Malý a střední podnik v podmínkách regionálního prostředí, in: Region v rozvoji společnosti 2016 (pp. 568–574), Sborník příspěvků z mezinárodní vědecké konference. Brno: Mendelova univerzita v Brně. Markman, G.D. (2007), Entrepreneurs’ competencies, in: J.R. Baum, M. Frese, R.A. Baron (eds), The psychology of entrepreneurship (pp. 67–92), London: Earlbaum Associates Publishers. Pilková, A., Holienka, M., Kovačičová, Z., Rehák, J. (2016), GEM Slovensko 2015: Komerčné, sociálne a inkluzívne podnikanie na Slovensku, Bratislava: Univerzita Komenského Fakulta managementu. Šebestová, J., Rylková Ž., (2011), Competencies and innovation within learning organization, The Journal Economics and Management, 16(1): 954–960. Šebestová, J. (2016), Ovlivňuje motivace k podnikání vnímání podnikatelského prostředí? Případová studie z Moravskoslezského kraje. Scientific Papers of the University of Pardubice, Series D, 23(38): 177–189. Školudová, J. (2015), The Impact of enterprise social networks at the costs of internal communication in organizations in Czech Republic, SGEM International Multidisciplinary Scientific Conferences on Social Sciences and Arts, 2(2): 467–474. Syrovátková, J., Verl, J. (2011), Historical and cultural advantages of the Liberec region as a factor of development of the Northern part of the Czech Republic,

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in: Izvestija vysšich učebnych zavedenij. Technologija tekstilnoj promyšlennosti (pp. 39–42), Moskva: Ivanovo State Textile Academy. Tureckova, K., Martinat, S., Skrabal, J., Chmielova, P., Nevima, J. (2017), How local population perceive impact of brownfields on the residential property values: some remarks from post-industrial areas in the Czech Republic, Geographia Technica, 12(2): 150–164. Von Graevenitz, G., Harhoff, D., Weber, R. (2010), The effects of entrepreneurship education, Journal of Economic Behavior & Organization, 76(1): 90–112. Weber, R. (2011), Evaluating entrepreneurship education, Munich: Springer. Zapletalová, Š., Meixnerová, L., Menšík, M., Pászto, V., Sikorová, E. (2015), Character of entrepreneurial subjects in Olomouc region, EMI, 7(3): 21–31. Zich, R. (2010), Koncepce úspěchuschopnosti a její pojetí strategie, E a M: Ekonomie a Management, 10(1): 60–74. Jarmila Šebestová, Associate Professor, is an experienced researcher focusing on small businesses. She has participated in a number of international projects, including IPREG (Innovative Policy Research for Economic Growth) and the E-WORLD project (International Entrepreneurs Network). She is Vice President of the European Council of Small Businesses for the Czech Republic. Research interests: small business performance, small business dynamics and strategy. Žaneta Rylková, Assistant Professor, her main research field is on enterprise economics, management economy, measurement and management of company performance, innovation activities of the company; she is author or co-author of 7 monographs, more than 40 scientific articles published in conferences or scientific journals (citation 67x Google Scholar). Petra Krejčí, PhD student of the study program Business Economics and Management, she dedicates her work to innovative business activities and human capital; she is experienced with projects organized by SU OPF and as project assistant for the LAG Horní Pomoraví. Monika Lejková, MSc student in the Entrepreneurship field, she has had experience with purchasing and logistics in several international companies. Now she is working on competency models for start-ups.

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Anna Bazan-Bulanda

e-mail: [email protected] Częstochowa University of Technology, Poland

Agile PM: The possibility of using Timeboxes in projects implemented as public orders Abstract. Today’s enterprises have to meet the demands of a turbulent environment. The chances of successful enterprise participating in the implementation of projects in the field of public procurement and the opportunity to increase market share are offered by Agile PM. The aim of the article is to assess the possibility of using Timeboxes in projects implemented as public orders.

Introduction The functioning of enterprises in a changing, unpredictable environment requires from the managing staff the use of management methods that will help to adapt to the existing conditions and what is related to them to survive on the market. “Contemporary organization operates in a rapidly changing reality, in which the changes take place in many spheres and fields of life – including political, legal, social, market or technological. The environment of the organization is also changing. Its complexity, volatility, uncertainty and unpredictability cause that contemporary organizations face serious challenges that they must face up to” (Janiak 2011: 85). The company should demonstrate agility in its operations. It is needed in all types of activities; however, this feature is particularly desirable on the public procurement market. According to Article 44 (3) (2) of the Act of August 27, 2009 on public finance (Journal of Laws 2017, item 2077, as amended), public expenditures should be made for the amount and dates resulting from liabilities contracted earlier. A public entity may not deliberately fail to execute its obligations also on the basis of public procurement. The fact that an enterprise obtains such a contract gives it a guarantee of timely payment by the ordering party. Being agile may, however, be insufficient for successfully obtaining public procurement. The reaction to this turbulent environment and the help

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in obtaining contracts may be the application of the Agile PM principles by the organization. The aim of this chapter is to assess the possibility of using Timeboxes in projects implemented as public contracts. The research method used was the analysis of the subject literature, legal acts and documentation of tenders for company X, as well as an interview conducted with 32 people implementing projects in the field of public procurement. Among the respondents were the person managing the company and the manager of the public procurement department as well as employees employed in all units performing the order: public procurement, printing, accounting, procurement, marketing and sales.

1. The main features of agility One of the challenges for enterprises is the unpredictable, changing environment. “Both the domestic and foreign activities of business entities entice entrepreneurs to undertake various actions with the aim of achieving the desired market position. Enterprises strive towards the achievement of a highly competitive position on the market and maintaining such a position” (Skowron-Grabowska and Sukiennik, 2015:1046). “Thompson (1967) argued that one of the most important tasks of the organization is the management of uncertainty. Drucker (1968) describes the concept of entrepreneurship as a search for change, responding to change and using change as an opportunity” (Sharifi and Zhangs, 2001: 77). Agility is recognized as the ability to respond quickly to changes and adapt to them. Cobb, after David Rico, defines agility as “the ability to create change and respond to it in order to benefit in a turbulent global business environment; the ability to quickly change the priorities of resource use when requirements, technology or knowledge changes; quick response to sudden market changes and emerging threats thanks to intensive cooperation with the client; the use of evolutionary, incremental and iterative methods of product delivery to arrive at the optimal solution from the client’s point of view; maximizing business value by means of processes and documentation implemented in the right size, as many as needed and exactly on time” (Cobb, 2012: 4). Agility provides the company with a competitive advantage. Trzcieliński recognizes that it is necessary to take advantage of opportunities for the agility of the company. The opportunity is perceived as a favorable situation for the subject in achieving the intended goal, which exists in the environment of the subject or is a postulated state

A. Bazan-Bulanda: Agile PM: The possibility of using Timeboxes in projects...

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of the characteristics of this environment (Trzcieliński, 2011: 49). Occasions relate to events occurring in the environment of the entity, the result of the action intended by that entity and the potential that the entity has or can dispose of and which is necessary to achieve the goal (Trzcieliński, 2011: 43). The agility of the company is also recognized as the ability to make effective changes in the scope of ongoing operations, processes and business connections in response to the ever-changing situation, both in the environment and inside the organization (Walczak, 2010: 328). A quick response to the changing environment is possible only if you use your resources properly. The agile company uses both its own and external resources. The ability to quickly find, obtain and use resources to make use of an opportunity which appears is also a necessary feature of an agile organization. It is essential for every organization to analyze the environment in which it has to operate, in order to be able to identify the favorable prospects and opportunities at hand and avoid any unwanted effects of negative external factors influencing the situation (Volkova, 2015: 479). The flexibility of using resources may manifest itself in the conscious limitation of maintaining own resources and using the resources of external partners by undertaking cooperation on the basis of various forms of partner cooperation (Włodarkiewicz-Klimek, 2016: 217). The company is not able to achieve agility without human involvement in terms of subject or object. Only proper use of the potential of the team, regardless of whether they will be employees in the sense of law, or people associated only with a specific project, such as a specific public order, will enable the organization to achieve agility. Appelo (2016: 89) pointed out five criteria that must be met in order for the “human system” to work. They are: knowledge, creativity, motivation, diversity and personality. It should also be agreed with Trzcieliński that agility is not a specific state and can reach different levels. The highest level can be achieved only by enterprises that have a qualified, creative management team able to make quick decisions and a team which makes full use of their resources.

2. The concept of public procurement The legal definition of a public contract is provided by legal acts. “The European legislator focused on the contract as the key legal act for orders, because it involves making a declaration of will, in which an institution with public funds undertakes to pay. A similar solution was adopted by the Polish legislator in Art. 2, point 13 as amended of the Polish Civil Code, in which

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he entered into a legal definition of public procurement (Wieloński, 2012: 29). The statutory definition of public procurement is included in Art. 2, point 13 of the Act of 29 January 2004 on Public Procurement Law (i.e. Journal of Laws of 2013 item 907, as amended), according to which it is a paid contract concluded between the contracting authority and the contractor, the subject of which are services, supplies or construction works. “The payable activity is a bilateral and simultaneously bilateral obligation, under which each party is to obtain a certain property benefit, which may consist of transferring an amount of money, transferring some right (e.g. receivables), providing services, etc.” (Ziemianin, 2002: 202). “Public procurement is one of the important issues of the functioning of modern states of law, where the authorities of this state are obliged to act on the basis and in the area of law. In the system of Polish law, it is also important that public procurement is inextricably linked to the spending of public funds, which takes place according to legal rules” (Sadowy, 2013: 16). The legal definition of public procurement is too narrow and does not fully reflect the essence of this mode of operation. For a company participating in the public procurement process, it is a special type of project understood as a complex action or a sequence of unique and related tasks that have a common goal and are to be completed within the set deadline, without exceeding the set budget, as required (Wysocki and McGary, 2005: 47). For the contractor, the public procurement contract is one of the elements of this project. This is, of course, the necessary component part constituting the basis for possible claims of both the contracting authority and the contractor. The entire process related to the conclusion and performance of the contract is of crucial importance for the enterprise participating in public procurement. It is undoubted that every entity, already at the stage of planning the start of efforts to obtain an order, must take certain actions; for example, it should analyze its economic, technical and organizational potential to determine whether it is able to perform them. From the entrepreneur’s point of view, all activities related to the public procurement contract, i.e. the conclusion and performance of the contract, and any possible warranty repairs, are treated as one public contract. “It is undoubted that every entity, already at the stage of planning the start of efforts to obtain an order, must take certain actions, for example, it should analyze its economic, technical and organizational potential to determine whether it is able to perform them. From the entrepreneur’s point of view, all activities related to the public procurement contract, i.e. the conclusion and performance of the contract, any possible warranty repairs, are treated as one public contract.” “Therefore, one should agree with the view that we are talking about public orders in the strict sense of the agreement, and public orders in


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the sense of a largo. Only the public procurement contract is too narrow a shot, the phase of its implementation and settlement should also be treated as a public contract” (Panasiuk, 2007: 60). However, in order for it to be concluded, the entrepreneur must perform many activities beforehand. The basic is to submit an offer in accordance with the requirements specified by the contracting authority in the SIWZ (specification of essential terms of the contract). ”In the Polish legal system, the basic source document containing all relevant conditions of the contract is specification. From a legal point of view, the specification is the manifestation of the will of the contracting authority and all provisions contained therein should not contradict each other, as this introduces an element of uncertainty for the contractor, which provisions of the specifications are binding and may constitute for the contractor a reliable source of information about the requirements of the contracting authority” (Jeraka 2012: 23). The Awarding Entity, when awarding a public contract, is obliged to apply the principle of free competition and cannot select a specific entity without using public procurement procedures. It can only specify the requirements that the contractor has to meet. Indication of them makes it possible to narrow the circle of contractors, which does not mean the possibility of departing from the principle of freedom of competition. As indicated by the KIO (National Board of Appeal) in its judgment of 03 August2009, the awarding entity, as the host of the proceedings, defines the scope both subject and subjective, characterizing the goal that it intends to achieve (KIO/ UZP (Public Procurement Office) 951/09, LEX). This description should be precise. As the KIO stated in its judgment of 23 June 2010 (reference number KIO / UZP 1100/10), the contracting authority should include in the description of the subject matter full information on all factors affecting the formation of tenders by contractors, and contractors have the right to expect this from the contracting authority providing them with the opportunity to obtain all the information relevant for the design of the SIWZ. Although the obligation to clearly form the contents of the SIWZ results from the regulations in practice, applicants seeking an order are often forced to ask questions of the contracting authority, which are intended to clarify the description of the subject of the contract.

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3. Agile PM: Timeboxes DSDM is a proven framework for agile project management and delivery, helping to deliver results quickly and effectively and, over the years, has been applied to a wide range of projects – from small software developments all the way up to full-scale business process change. DSDM was initially created in 1994 through collaboration of a large number of project practitioners across many companies who were seeking to build quality into Rapid Application Development (RAD) processes as they developed, primarily, business-focused computer solutions. The Agile Project Framework is an evolution of DSDM Atern®, the previous version of DSDM. It provides the information that is essential to enable any role on a DSDM project to use DSDM effectively and to understand how it is applied in practice (Agile PM: 10). Timeboxing is one of DSDM’s key practices. DSDM defines a Timebox as a fixed period of time, at the end of which an objective has been met. The Timebox objective is usually completion of one or more deliverables. This ensures the focus for a Timebox is on achieving something complete and meaningful, rather than simply “being busy”. At the end of a Timebox, progress and success are measured by completion of products (requirements or other deliverables) rather than completing a series of tasks (Agile PM: 58). Timeboxes cannot be equated only with the division of the project implementation period into time sections during which tasks are to be performed. It is a process that begins with Kick-off and ends with a Close-out. In DSDM, we differentiate two styles of Timeboxes: a DSDM structured Timebox and a free format Timebox. The choice of the type of Timebox depends, among other things, on the type of product to be delivered. A DSDM structured Timebox comprises three main steps: Investigation, Refinement and Consolidation. The free format Timebox also starts with a Kick-off and finishes with a Close-out. During the start of the Timebox, the presentation and acceptance of its goals as realistic by the team takes place. Completion of a Timebox aims to accept the implementation of tasks performed in a given time interval. In the event of non-performance of any tasks at the completion stage, the issue of their subsequent implementation is resolved. The most favorable situation for the project is when all the tasks are completed. Determining the time of completion of tasks is necessary, because if the tasks in each Timebox are performed on time, the project will also end on the set date. Timely implementation of each project is desirable and, in the case of projects in the field of public procurement, it is necessary and results from the law.


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4. Analysis of test results The company in which the study was conducted is a limited liability company operating in this legal form in Silesia since 2003. The main subject of its activity is publishing, including publishing periodicals. The company participates in public procurement primarily for services and their main subject are: printing and delivery services, as well as related services. From 2012–2016, the company received 14 service contracts and 12 public procurement contracts. The company has obtained 26 orders from 19 procuring entities, and the total value of tenders won is PLN 2 072 433. In the breakdown into individual years, the value and number of orders received is presented in Table 1. Table 1. Orders obtained from 2012–2016 Year

Quantity

Value

2012

3

538 621,10 PLN

2013

7

503 781,43 PLN

2014

6

808 253,90 PLN

2015

2

34 766,89 PLN

2016

8

187 009,89 PLN

Total

26

2 072 433,2 PLN

Source: a study based on the Public Procurement Bulletins of 2012–2016.

Taking into account the seat of the entity awarding the public contract, the largest number of units was located in Mazowieckie Voivodeship and then in Małopolskie Voivodeship. The number of public orders obtained by the company generally increases; the exception was 2012, which was the lowest, because only two orders were obtained. However, most orders awarded to the company were in 2016. The figures only indicate those orders that have been resolved by selecting the most favorable offer. Procedures which have been annulled by the ordering party for various reasons and in which the offer was submitted by the company are not considered. The grounds for annulment are set out in the regulations. One of them is the situation when the prices of all submitted offers exceed the amount allocated by the ordering party for the performance of the contract. In this case, the contractors, despite all due diligence and proper preparation of the offer, will not obtain the order. The value of the contract should be real and the estimate made by the ordering party honest; however, in practice, there are situations when the estimate differs to a large extent from the market value. The interviews were conducted in February 2018 and all the respondents were asked the same questions. The interview was open.

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The first question was: Are the works divided into stages when making a decision about starting a public procurement effort? In total, 28 people answered yes and 4 did not have an opinion on this topic. Persons giving an affirmative answer to the first question were asked to indicate which parts of public procurement projects are shared. All participants of the projects indicated two: the first includes activities related to the preparation of the offer, while the second one occurs after the contract for the public procurement has been signed. It consists of activities aimed at fulfilling the order – delivery of printed materials. For each order, the first stage – preparation of the offer – includes the completion of the necessary documents and the preparation of the offer. In a situation when a company joins a tender within a consortium – the first stage consists of four modules: collection of company documentation, preparation and conclusion of a consortium agreement, completion of documents held by the consortium and needed to prepare the offer, preparation of the consortium’s offer as a contractor. The order fulfillment stage is divided into individual modules for technical reasons. In the case of a consortium, individual consortia perform only part of the print. Therefore, the timeliness and completeness of tasks in individual parts is necessary for the implementation of the entire project. All the persons interviewed said they had a strictly determined time in advance to perform their activities. Before starting to carry out their tasks, the team leader, usually the head of the public procurement department, explains the scope of work, and after completing them, he checks what has been done. The total number of respondents answered negatively to the question about the possibility of extending the deadline for completing tasks. Only the stage for preparing the offer may be prolonged if the ordering party prolongs it. However, this is completely independent of the project team. The delivery of the finished object of the contract results in public contracts from the contract, which usually contains high contractual penalties for untimely performance of the contract and also provides for the possibility of terminating the contract by the contracting authority in specific cases.

Conclusions DSDM as agile management applies to various types of projects. A public contract is a special type of project and therefore Agile PM rules can also be applied in this case. As in all situations, DSDM rules must be applied appropriately to the type of project. The use of Timeboxes is used to ensure


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delivery on time. In any project, its timely implementation is important, but in the case of public procurement it plays a special role. Entrepreneurs who are not public entities may, in case of necessity, negotiate the delivery date. In public procurement this is unacceptable in the regulations. As it results from the research carried out, projects in the field of public procurement can distinguish modules containing specific tasks to be carried out within a strictly defined period of time. In the company under study, these modules can be considered as free time formats. They begin with Kick-offs and finish with a Close-out. The persons employed in the surveyed company have both the knowledge and skills to work in changing conditions and in the international environment. They also demonstrate creativity, which allows for quick adaptation to external conditions. Proper preparation of tender documentation requires effective cooperation of people employed in all units performing the contract: public procurement, printing, accounting, procurement and sales. Proper preparation of tender documentation requires effective cooperation of people employed in all units performing the contract: public procurement, printing and accounting departments, supplies and sales. “Agile teams work more efficiently. The emphasis is on interdisciplinarity and self-organization. With agile projects, task groups are created spontaneously, so that soon after the challenge can be quickly solved, and their members join the next projects” (Duda, 2017: 21). This research was preliminary. For the introduction of more general applications, it should be extended to other companies operating on the public procurement market.

References Agile Projekt Management, Handbook v2 (2016), Wydanie polskie, DSDM CONSORTIUM. Appelo, J. (2016), Zarządzanie 3.0. Kierowanie zespołami z wykorzystaniem metodyk agile, Gliwice: Helion. Biuletyny Informacyjne Urzędu Zamówień Publicznych 2014–2016, available at: https://www.uzp.gov.pl, (accessed 10 December 2017-16 March 2018). Coob, Ch.G. (2012), Agile project management. Równowaga kontroli i elastyczności, Warszawa: APN Promise. Duda, J. (2017), Dział HR w zwinnej organizacji przyszłości: czym jest metodyka agile i jakie korzyści może przynieść zwinnej firmie?, Personel i Zarządzanie, 9: 18–21. Janiak, W. (2011), Outsourcing, in: M. Hopej and Z. Kral (eds), Współczesne metody zarządzania w teorii i praktyce (pp. 85–95), Wrocław: Oficyna Wydawnicza Politechniki Wrocławskiej.

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Jeraka, J. (2012), Przewodnik po nowym podejściu do zamówień publicznych. Zagadnienia prawne oraz praktyka stosowania instrumentów nowego podejścia do zamówień publicznych, Warszawa: Polska Agencja Rozwoju Przedsiębiorczości. Panasiuk, A. (2007), Publicznoprawne ograniczenia przy udzielaniu zamówień publicznych, Bydgoszcz-Warszawa: Oficyna Wydawnicza Branta. Sadowy, J. (2013), System zamówień publicznych w Polsce, Warszawa: Urząd Zamówień Publicznych. Sharifi, H., Zhang, Z. (2001), Agile manufacturing in practice: application of methodology, International Journal of Operations & Production Management, 21(5/6): 72–793. Skowron-Grabowska, B., Sukiennik, K. (2015), Innovations in e-enterprises on the Polish market, Procedia Computer Science, 65: 1046–1051. The Act of 29 stycznia 2004 r. Prawo zamówień publicznych, (Journal of Laws 2013, item 907. Trzcieliński S. (2011), Przedsiębiorstwo zwinne, Poznań: Wydawnictwo Politechniki Poznańskiej. Volkovaa, A. (2015), Economic prospects in the context of growing global and regional interdependencies, Procedia – Economics and Finance, 27: 479–483. Walczak, M. (2010), Systemy zwinne w organizacji produkcji, Acta Universitatis Lodziensis Folia Oeconomica, 234: 347–360. Wieloński, M. (2012), Realizacja interesu publicznego w prawie zamówień publicznych, Warszawa: Wydział Dziennikarstwa i Nauk Politycznych Uniwersytetu Warszawskiego. Włodarkiewicz-Klimek, H. (2016), Koncepcje i modele zwinnego zarządzania, Zeszyty Naukowe Politechniki Poznańskiej. Organizacja i Zarządzanie, 71: 213–225. Wysocki, R.K., McGary, R. (2005), Efektywne zarządzanie projektami, Gliwice: Onepres. Ziemianin, B. (2002), Prawo cywilne. Część ogólna, Poznań: Ars boni et aequi. Anna Bazan-Bulanda, PhD is lecturer in the Department of Public Management and Law of the Institute of Sociology and Psychology of Management at the Faculty of Management of the Czestochowa University of Technology, doctor of law. She is author of several scientific publications including two books and a scientific co-editor of five monographs. Her scientific and research interests combine elements of management, in particular Agile PM, with the law and the impact of public procurement on company management. Her scientific interests focus on the impact of public procurement on business management. The issues of public procurement are also dealt with in practice. In 2004, she received the Bronze Cross of Merit, in 2012, the Medal of the Commission of National Education and in 2014, the Medal of the 65th anniversary of Czestochowa University of Technology.

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Iwona Gawron

e-mail: [email protected] State Higher Vocational School in Nowy Sącz, Poland

Sławomir Ziółkowski

e-mail: [email protected] AGH University of Science and Technology in Cracow, Poland

The role of trust in a knowledge-based economy Abstract. Building relations based on trust is a key factor in the management of modern enterprise as well as the development of efficient competitive strategy in the context of a knowledge-based economy. The atmosphere (climate) of cooperation, kindness and trust has a significant influence on work efficiency, achievement of synergy and enhancement in the quality of knowledge transfer between organization members and entities operating in the new economy. The aim of this paper is to show the role of trust from various perspectives: unit, organization and market. Key words: knowledge-based economy; relations; knowledge; trust

Introduction Globalization, virtualization of economy, network organizations, employees of knowledge – these are terms that are a permanent part of the scientific discourse of researchers in such fields as sociology, economy or management and also business practitioners – entrepreneurs, managers or HR specialists. Progress in the matter of IT has caused, within a short period of time, dynamic socio-economic changes, due to which the period known as the industrial age was replaced by the so-called post-industrial age. The transformation touched practically every walk of life in modern society, and on the one hand, it created enormous possibilities e.g. in communication, science or business, but on the other hand, it generates numerous challenges, threats and irreversible changes. It is especially noticeable in the sociological and economical dimension. The generations that now enter the world of adults and the work market at the same time, have already been born in new economy and they have practically never experienced any other reality than life in an IT society.

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1. Knowledge-based economy – conceptualisation of the term One of the most important challenges brought by the economy based on knowledge, is a rapid change of proportions – from the focus on material resources and industrial production, towards non-material resources (especially knowledge), and provision of services. The term knowledge-based economy (KBE) is defined in the literature in various ways by different authors; however, two repeated themes may be distinguished: focus on efficiency of production and knowledge management, and wide application thereof. This corresponds with an original definition given by the Organization for Economic Cooperation and Development (OECD), that describes it as a new type of economy, that “is directly based on production, distribution and application of knowledge and information” (OECD, 1996: 7). It should be noted however, that this definition was expanded upon in common documents of the OECD and the World Bank (WBI) and it was finally formulated as an economy that supports organizations and people in collecting, creating, promoting and using knowledge in a more effective manner for economic and social development (OECD-WBI, 2000: 32). Also, Koźmiński draws attention to the aspect of creating proper conditions for development by stating that the KBE distinguishes “creating conditions that favor development and success of enterprises that base their competitive advantage on knowledge” (Koźmiński, 2001: 87). In turn, Skrzypek (2011: 279) draws attention to key conditions that favor the occurrence of the new economy, even referring to them as the foundations of KBE. According to the author, these conditions are as follow: –– Human capital; –– ICT– Information and Communication Technology; –– Social capital (trust, cooperation and social networks); –– Organization-level knowledge management. According to Czyż and Chojnicki (2006: 423), KBE is a type of economy, development and transformations for which take place under the dominant influence of science. The impact of scientific progress becomes a main factor for economic development. The mutual influence of science and business, supported, however, by the proper policy of authorities, are key determinants of creation of a real knowledge-based economy. Kukliński (2018: 6) claims that the KBE’s development is “a profoundly conditioned, holistic economic, social, political, scientific and cultural process”. In this context, he presents five major subjects that condition the development of a new economy:

I. Gawron, S. Ziółkowski: The role of trust in a knowledge-based economy

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–– Enterprise – the author writes about the population of entities (acting both on a local and global scale), that fulfill the foundation of KBE’s definition by basing their competitive advantages on knowledge. “This process is defined not only as dynamics of spontaneous forces of free market but also as a scale of strategic control of large businesses of the global scene, especially countries, trans-national corporations and international corporations”. –– Society – that possesses proper resources, skills and will for longterm thinking and acting. Kukliński underlines that these resources are connected with such features as competitiveness (understood as a fundamental mechanism of society organization), innovativeness and awareness of the necessity of permanent education. –– Public authorities – as a stimulus for creation of favorable conditions for KBE’s development in social, political, scientific and cultural areas. –– Science – that must face three basic challenges concerning changes of paradigms and interpretation of dynamics of science and research in modern societies, theories of the process of creation and innovation diffusion and a new theory of economic development that accepts knowledge as the most important endogenic factor of production and the most crucial “input” of functioning of “the engine of capitalism”. –– Culture – treated as the system of values, that creates a climate of openness, trust and innovation (Kukliński, 2018: 6-10) Also, Koźmiński (2001: 33), in his definition of the new economy, lists the key KBE elements, which are, i.e.: –– state; –– local authorities; –– enterprises (especially from the financial sector); –– intellectual and academic communities. The authors of the OECD/WBI document, however, indicate the following: –– regime (economic and institutional); –– educated and qualified society; –– technological infrastructure; –– research-development sector in the form of universities, research centers, think-tanks, etc.

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However, as they underline, the definition of KBE “… does not focus only on a narrow part of industry of high technology or IT and communication technology. This definition creates a framework for the analysis of the entire spectrum of options in educational policy and policy in the matter of information infrastructure and innovation systems, that promote development of G.O.W. This definition also underlines a role of better coordination between activities of the government, private sector and civil society – in order to reinforce the competitiveness and enhance the economic and social development” (OECD-WBI, 2000: 32). These are conditions necessary for the growth of effectiveness and flexibility of the economy and its capacity to face modern challenges, including supporting subjects/entities struggling with market competition, which are ready to share the results of their activity (e.g. innovation) with the society. Therefore, it is clear that assumptions of the knowledge-based economy are not based only on codependence in the praxeological sense, but also on a symbiosis of various subjects, a necessary condition for which is trust. A famous futurologist and author of the bestseller Inevitable, Kelly (2017: 92), notes that one of the most characteristic achievements of the information society is “circulation and copying”. In the era of the dominance of non-material products and globalization (and therefore, their near limitless transfer in real time), the problem of protection of knowledge, its justified and proper application, and generally speaking, trust, is of special importance here. In a knowledge-based economy, investments also carry a bigger risk – both authorities (central and local), the task of which is to create proper economic conditions, and business representatives that locate their capital in “prospective” undertakings, must face a significantly higher level of uncertainty and very often a long-term perspective of results. Therefore, it should be noted that trust in the KBE is a key element both on the level of society and system (creating social capital, regime), inter-organizational level (B2B, business angel), level of organization (conversion and knowledge protection, intra-organizational transfer) and level of units (externalization of knowledge and its “viscosity”).

2. Trust in the knowledge-based economy Despite the fact that the concept of trust seems to be fairly obvious and unambiguous even in its colloquial meaning, numerous attempts at defining and researching this phenomenon have encountered serious difficulties right at the conceptualisation stage. Trust is a kind of concept which may be


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analyzed from the perspectives of various scientific disciplines such as: ethics, psychology, sociology, anthropology, marketing and management. Lewicka et al. (2016: 45) note that the “distinction of knowledge between colloquial and scientific seems to be relevant in the context of research on trust. Difficulty in the conduct of research manifests itself in the possibility of different understanding of the subject matter by researcher and sample persons. There is no guarantee that the respondents have a scientific understanding of the research subject.” She also points out the cognitive character of the concept, which is inseparably linked to personal perception and cognitive determinants. The implications of the applied perceptual filters together with the unavoidable subjectivity in the perception of the same issue by two or more people, even in case of precise operationalization of the trust concept, may become an important obstacle to the research being carried out (Wierzbiński, 2009). What should be mentioned here as well is the emotional character of trust, which is present in interpersonal relationships and is fundamental for building such ties. The parties involved trust each other and believe that any of them will count against the other one. Therefore, we deal here with a motivational aspect (often wishful) connected with the assumption that a relationship based on trust will be characterized by mutual cooperation, goodwill and fair conduct. “Trust in somebody or something means, that the other party shares our standards of behaviour and values and will work for our benefit and will not cause any harm to us” (Lewicka-Strzałecka, 2003: 197). In turn, lack of trust between people generally leads to continuous suspicions, frustration and eventually termination of the relationship and breakup. Figure 1 shows factors contributing to trust and their consequences in partnership relations based on trust. As the research shows, important differences in the perception of trust as a social phenomenon come not only from the unit’s individual point of view but also from opinions shared by entire social groups or even nations. According to Edelman’s Trust Barometer 2018,1 Poles belong to the group of those nations who are the most distrustful in the world. As regards trust in institutions, this year Poland found itself in the group of six countries (next to China, UAE, Sweden, South Korea and Malaysia) where the overall percentage of social trust in institutions is increasing – it is, in fact, higher this year by 17 percentage points than last year (wirtualnemedia.pl, 2018). Only one in Edelman’s Trust Barometer is an international survey of trust and credibility, which has been carried out for 18 years by the company called Edelman – the biggest network company in the world specializing in marketing communication and public relations. This year’s survey was conducted among 33 000 respondents in 28 countries during the period from October 28 to November 20, 2017 and took the form of a 25-minute online questionnaire. 1

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four Polish citizens trusts their government compared to 84% of the population in China declaring trust in its government. Figure 1. Building relationships based on values Factors contri�u�n� to trust

Their consequences in partnership rela�ons �ase� on trust

Maximising benefits connected with being into a partnership rela�onship

Reduc�on in risk associated with purchases �unc�oning according to supplier’s recommenda�ons

Building mutual rela�ons

Efficient communica�on

Reducing vulnerability to loose customers

Partnership rela�on �ase� on trust

Lack of opportunism

Being concentrated on value

Inves�ng into strengthening the rela�ons

Be�er coopera�on Construc�ve disputes

Solving problems

Source: Doyle 2003: 101.

As for the analysis of public trust in the media in the countries under research, the average index is at 43%, while in Poland - 34%. Among the nationalities which trust their media most, the following are listed: Chinese, Indonesian and Indian. Trust in non-governmental organizations in Poland has risen from 48% in 2017 to 54% in 2018. The highest level of trust in non-governmental organizations is declared to ne 70% in Mexico while the least trustful in non-governmental organizations are the nationals of Russia (25%).


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Based on the respondents’ answers an interesting regularity has been observed. There is a slight increase in trust in business among half of the surveyed countries in comparison with the year 2017. Overall, 46% of Poles declare their trust in business. The highest level of trust in the business sector is declared by residents of Indonesia (78%), while the lowest is by inhabitants of Hong Kong (36%).

3. Trust in a knowledge-based economy: Perspective of a unit Almost all publications that touch upon the issue of human capital (e.g. Czerniachowicz 2002; Juchnowicz, 2007; Król and Ludwiczyński, 2006; Skrzypek 2009) in management underline that people and their knowledge are the most valuable resources of modern organizations. Despite common automation and robotization, and an unprecedented rate of AI development, it is the employee, his/her competence, attitude and creativity that are the basis for the existence of organizations that function in the knowledge-based economy. The term knowledge worker has occurred in two works by Nonaki, a co-author of one of the most important theoretical models of organization knowledge management, the so-called Japanese model (Nonaka and Takeuchi, 2000). Firstly, the researchers distinguished between tacit (in the epistemological dimension) and explicit knowledge. These two types of knowledge are subject to conversion in processes of transfer on the level of environment – organization – employee, that the authors called the SECI cycle (from the first letters of the four processes of the cycle: Socialization, Externalization, Combination, Internalization). In the frame of the cycle, the conversion takes place in various manners and covers a transformation of tacit knowledge in tacit knowledge (by socialization) during direct contact of employees, common work, or team discussions, externalization – which is a formal expression of tacit knowledge and conversion to explicit knowledge, after which codification (combination) may be distributed across the organization. Another process of the cycle is internalization, which takes place through accommodation of explicit knowledge by employees and on the basis of own experience and knowledge, transformation into a new (enriched) tacit knowledge. The role of trust in conversion processes is important. Similarly to enterprises that operate in KBE, where creating a competitive advantage is based on knowledge obtained and created, also the external competence across

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organizations is based on non-material resources possessed by employees. This especially applies to tacit knowledge that is a resource developed in the course of education and human work and is strictly connected with unique experiences, competencies and the creativity of employees. So how should employees be encouraged so that they are willing to share this strategic resource with the organization? This problem, called sticky knowledge, that is a resistance to share knowledge and keeping it for oneself, occurs across organizations at both an individual and team level. It is necessary to create proper conditions and an organizational climate (Czakon, 2007) that favour mutual trust in any fields. On the one hand, the organization takes a risk in employing an employee and hopes that for effective work, such an employer will use not only explicit, codified and available knowledge in the enterprise but also will be willing to use and disclose (share) his/her tacit knowledge. To do this, the employee must trust members of his/her team – his/her initiative cannot be alienated so by sharing his/her strategic resources – and the employee counts on the mutuality of others. Also, on the level of organization, there must be awareness that the inclination to share tacit knowledge, experience and skills by the employees (especially at an operational level) is determined by creation of a proper organizational culture, efficient reinforcement system and transparent communication system, including control processes, infrastructure and tools that allow available repositories, databases and knowledge or bases of good practices to be built. In this manner, there is a creation of capital of the organization, that in the frame of competitive fight is exposed to loss or outflow of resources collected, especially because, with current technological development, non-material resources in the form of digital data are far more transferrable (available, cost, risk) than ever. Thus, the priority issue is, on the one hand, based on building a system that secures and protects organizational knowledge with simultaneous assurance of tools that fulfill basic functions: ordering, distinguishing, valuing, spreading and storing and presenting knowledge (Jashapara,2006). On the other hand, even the largest investments in solid, infrastructural security systems against unauthorized knowledge transfer may constitute, at best, a support for crucial challenges in the soft area – building loyalty, cooperation and trust in the employee-organization relationship dyad. The same dilemmas are connected with single units, that in a synergic manner, along with other people, create so-called social capital. Each human, by adapting certain assumptions for their own permanent development and education, including investment in potentially competitive resources, hopes that the system in which he/she functions (whether it is at the level of regime


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or market), allows not only return but also profit from such investment. Only then will he/she be ready to use his/her own resources and contribute to creation of added value growth in KBE. In this context, each unit, by deciding, on the one hand, to co-create social capital with others in a given system, and at the same time, being aware of competitiveness as a basic mechanism of social organization, agrees to participate in certain coopetition, the foundation of which is trust.

4. Trust in a knowledge-based economy: Perspective of an organization Trust is a particularly important element in the activity of modern organizations, which operate in today’s incredibly volatile and demanding environment. As we analyze the space within the organization, we pay attention to the fact that the employer expects the following from his/her employees: involvement in the company’s matters, creativity and efficiency (Figure 2). In turn, workers’ expectations may deal with: respect, recognition of the work done, equitable and fair treatment, opportunities for personal development and enrichment of knowledge. M. Bugdol defines trust as a “primary organizational value, which in order to be reached, requires strong ethical foundations, and in practice – the management type that determines operational values. This value has a positive impact on economic performance and should be a subject of persistent goals and activities. It is a kind of conviction/promise that the activities undertaken will result in achievement of the goals set and benefits for all stakeholders” (Budgol, 2010: 16). According to Nikowska (2011: 48), in order to create a climate of trust in the organization, it is worth making employees familiar with the company’s goals and mission statement and creating space for mutual creation of challenges. Additionally, workers should be encouraged and enabled to present their opinions and proposals for solutions, and organize joint meetings, which may help solve particular problems and inspire new solutions. Building a team, whose foundation is trust is a recipe for achieving a highly competitive position on the market.

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Figure 2. The role of trust in the management of knowledge workers Organiza�ona� �u�ture (apprecia�on of employees’ work, respect, work condi�ons, leadership through integra�on)

Trust in organiza�on Dedica�on, �rea�vity, Innova�on, �rowth in work produc�vity

Knowledge Worker • ideas • knowledge • qualifica�ons • skills • energy • reliability • honesty

Authorisa�on

Synergy effect (of numerous workers)

�ompe��veness of the organiza�on

Source: Grudzewski et al., 2008.

Partnerships based on trust contribute to long-term cooperation, whose tangible result may include loyalty of the customers, who will recommend the company and its products and will bring profits to the enterprise in the future. Researchers of this phenomenon, Grudzewski et al. (2007: 31) have recognized numerous benefits resulting from trust management, among others: –– reduction of transaction costs; –– improved coordination of activities; –– greater motivation to act; –– inspiring creative thinking; –– encouragement to take part in transactions; –– promotion for the exchange of knowledge and information; –– improvement of company’s capability to survive in case of crisis, –– development of a network of cooperation. In turn, Collins and Montgomery (after: Grudzewski, 2007: 32) consider trust as the company’s strategic resource due to the fact that: –– thanks to trust, a company can respond well to dynamic changes in a turbulent market environment; –– a high level of trust is an intangible asset of only a few organizations; –– interpersonal trust is understood in a specific sense as an “employee share ownership”, as it can refer to all workers in the organization; –– trust is characterized by high resistance to replication or automatic coping (difficult to imitate);


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–– our enhancement and creation of trust tend to grow over time; –– trust cannot be replaced with any other values as it is trust that stimulates other cultural norms; –– trust can be a foundation of the highly competitive operational strategy; –– trust cannot be shaped by any administrative regulations and codified organizational rules; –– trust covers almost all aspects of a company or organization’s functioning. Workers’ trust cannot be bought or built overnight. It is a long process and it requires the involvement of the management and employees. Mutual fulfilment of the agreed obligations, effective internal communication, cooperation and support in crisis situations create an atmosphere conducive to building durable, loyal and harmonious relationships between a worker and organization, which is also translated into good relationships between workers and clients. As Lewicka-Strzałecka (2007: 197) claims “trust management is becoming more and more important as a result of the increasing virtualization of company’s communication with customers, which is determined by several factors, that is: customer’s funds available, type of goods acquired by a customer, competition on the marker where particular goods are sold.”

5. Trust in a knowledge-based economy: An inter-organizational prospective The characteristic feature of the economy based on knowledge is coopetition, that is a special kind of co-existence and interdependence of business entities, especially at the inter-organizational level, that is determined by the creation of characteristic “climate”. As W. Czakon (2017: 13) puts it, quoting Kim (2000: 388–405), “the best predictor of inter-organizational climate is, in this context, trust – hence the well-known term climate of trust”. To analyze the interdependency of the entities, Czakon and Czernek (2016: 64–74) propose the simultaneous adoption of two dimensions: level of dyads and level of network, where the same mechanisms are observed yet taking different forms. As for the first level – in dyads – that is, an arrangement of two entities maintaining a relationship with one another (i.e. vertical relation: supplier – recipient) inter-organizational climate influences the way transactions are executed. Counterparties decide to start a relationship and its further

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expansion based on immediate needs and potential benefits. The pragmatism of decisions connected with the development of dyad is closely linked to production of such a particular climate, which – though is it defined in various ways by different authors (Czakon, 2017) – in each of the above-mentioned cases, implies the need for presence and development of trust. Table 1. Conceptualization of organizational climate in dyads Author

Year

Definition

Dimensions

Reve and Stern

1976

transactional climate refers to feelings, which exist between the parties to a transaction

trust sense of community

Anderson et al.

1987

inter-organizational climate is a partnership agreement, in which a member of the distribution channel feels mutual trust

coherence of goals mutual trust

Mohr and Nevin

1990

inter-organizational climate is a feeling of a certain level of trust and mutual support in an inter-organizational relation by members of the distribution channel

trust mutual support

Johnson and Gelb

1999

inter-organizational climate has an impact on the way people perceive the overall risk of cooperation

trust commitment

Kim

2000

inter-organizational climate is a collective perception of the social concept of relationship of exchange by members of the distribution channel

trust continuity solidarity

Source: Czakon, 2017.

The second level refers to the network of entities that operates in a particular environment defined in terms of geographical proximity (Knoben and Oerlemans, 2006), or opportunities for cooperation (Czakon, Czernek, 2016). “Conceptualisation of climate dimensions in case of inter-organizational cooperation justifies the three-dimensional approach to such business construct, that is, trust, willingness for cooperation, collaboration experience. Those dimensions are present at both levels of the analysis but they manifest themselves quite differently. The trust in dyad is directed at a particular partner or potential partner while the trust in network cannot refer to all its members, it is therefore directed at the leader” (Czakon, Klimas, 2017: 55). A specific type of such network is the virtual organization (Penc, 2001). According to Grudzewski and Hejduk (2000: 45), a virtual economic entity refers to the “set of organizational units, dispersed to various locations (even


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on a global scale) running a joint business venture, chosen dynamically – based on the procedural criterion – for a fixed period, and for specific tasks implementation”. It is characterized by decentralization of power, dispersion and flexibility. The real lack of hierarchy is also its main feature. It is a partnership of independent entities. The privileged position, yet in the context of tasks coordination and responsibility for the final effect, is taken by a leader, that is information broker (integrator), who usually initiates the cooperation with other entities. Its duties include: –– “creating the idea of joint venture; –– identifying the necessary key competences; –– designing a map of processes; –– selection of economic partners; –– allocation of economic processes; –– allocation of processes to particular companies according to their key competences; –– coordination, monitoring and navigating the project; –– review of the implementation of the project; –– assurance of product (service) delivery process to the customer; –– settlement of external (with customer) as well as internal transactions (between participants of virtual enterprise)” (Perechuda, 2000: 51–52). In the case of virtual organization, we therefore deal with the network, which is composed on an ad hoc basis from separate and independent entities by definition. The transfer of knowledge is a sort of forced form of cooperation and interdependence, but mainly on the level of the flow of information, which is essential for the equalization of knowledge when entering the network, as well as for the ongoing exchange of information for the progress of works under the carried-out project. In networks that consist of independent entities, whose market power and competitiveness are based on their unique knowledge resources, it is difficult to expect a voluntary and complete transfer of tacit knowledge recourses. Also, there are no promotions in such networks (flat organizational structure), no budget for loyalty or integration programmes. Nevertheless, they still make the best example of effective knowledge transfer. Pragmatism and easy calculation suggest that it is the extensive, multi-level cooperation, synergy effect of combining the potential of experts in various fields and conscious (as much as is needed, without “cluttering” the process) exchange of knowledge which contribute to the development of all entities and bring the network closer to goal achievement, for which they are held accountable

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in the end. Despite possible market competition between the entities within the implemented project, there is no such internal rivalry as the network does not allow for duplication of competencies, wastage and simulation of activities, which are common in traditional organizations. Thanks to high flexibility of the system, unnecessary or incomplete elements are immediately removed from the network or replaced with new ones. Therefore, the close cooperation and exchange of ideas between the participants is in the interest of the involved parties. From the network’s (here understood as an organization, where a vital role is played by an integrator) point of view, it is essential to build up organizational knowledge (memory), for example in the form of knowledge maps.

Conclusions Trust is a scarce resource in social and economic relations, which should be nurtured and taken care of continuously. The results of the study of the Polish population, which were published in the report “Social Diagnosis 2015 – Conditions and life quality of the Poles” (Czapiński and Panek, 2015) show how serious the problem of lack of trust is in our country. According to this report, Poland held one of the last places among other countries in the research published in the “European Social Survey” in 2014 in terms of overall trust. In 2015, only 10% of the respondents in Poland agreed with the statement that, “the majority of the people can be trusted” – this was four times less than in countries like Denmark, Norway and Finland. “In comparison to the representatives of other countries, Poles are also much less likely to believe in fellow people’s good intentions. According to the European Social Survey of 2012, only 14% of our compatriots (less was only declared by residents of Portugal and Bulgaria) and 13% as reported by Social Diagnosis of 2013 and 2015, was strongly convinced that, people usually try to be helpful to others” (Czapiński and Panek, 2015: 22). In the meantime, researchers on the subject agree that greater attention and good care of the development of partnership relations may pay dividends in the future in the form of a highly competitive position of the company on the market. The role of trust has become particularly important in the new type of economy based on knowledge, at the basis of which lies the application of knowledge and information. It is trust that enables us to control hidden knowledge, support innovative processes and introduce changes within the organization.


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References Bugdol M. (2010), Wymiary i problemy zarządzania organizacją opartą na zaufaniu, Kraków: Wydawnictwo Uniwersytetu Jagiellońskiego. Chojnicki Z., Czyż T. (2006), Aspekty regionalne gospodarki opartej na wiedzy w Polsce, Poznań: Bogucki. Wydawnictwo Naukowe. Czakon W., Klimas P. (2017), Klimat współpracy międzyorganizacyjnej w diadach i sieciach sektora turystyki, Handel Wewnętrzny, 3(368): 53–65. Czakon W. (2017), Klimat współpracy międzyorganizacyjnej, Studia Oeconomica Posnaniensia, 5(9): 7–20. Czakon, W., Czernek, K. (2016), The role of trust-building mechanisms in entering into network coopetition: the case of tourism networks in Poland, Industrial Marketing Management, 57: 64–74. Czapiński J., Panek T. (2015), Diagnoza Społeczna 2015. Warunki i jakość życia Polaków, Contemporary Economics, 9(4): 54–89. Czerniachowicz B. (2002), Kapitał ludzki jako źródło wzrostu konkurencyjności przedsiębiorstwa, Zeszyty Naukowe Uniwersytetu Szczecińskiego, 40: 87–96. Doyle P. (2003), Marketing wartości, Warszawa: FELBERG SJA. Grudzewski W.M., Hejduk I., Sankowska A., Wańtuchowicz M. (2007), Zarządzanie zaufaniem w organizacjach wirtualnych, Warszawa: Difin. Grudzewski W., Hejduk I. (2000), Przedsiębiorstwo przyszłości – wizja strategiczna, Warszawa: Difin. Jashapara A. (2006), Zarządzanie wiedzą – zintegrowane podejście, Warszawa: PWE. Juchnowicz M. (ed.) (2007), Elastyczne zarządzanie kapitałem ludzkim w organizacji wiedzy, Warszawa: Difin. Kelly K. (2017), Nieuniknione. Jak inteligentne technologie zmienią naszą przyszłość, Warszawa: Poltext. Kim K. (2000), On interfirm power, channel climate, and solidarity in industrial distributor-supplier dyads, Journal of the Academy of Marketing Science, 28(3): 388–405. Knoben, J., Oerlemans, L.A. (2006), Proximity and inter-organizational collaboration: a literature review, International Journal of Management Review, 8(2): 71–89. Koźmiński A.K. (2001), Jak tworzyć gospodarkę opartą na wiedzy? in: Strategia rozwoju Polski u progu XXI wieku, Warszawa: Kancelaria Prezydenta RP i Komitet Prognoz „Polska 2000 Plus” PAN. Król H., Ludwiczyński A. (eds) (2006), Zarządzanie zasobami ludzkimi. Tworzenie kapitału ludzkiego organizacji, Warszawa: Wydawnictwo Naukowe PWN. Kukliński A., Gospodarka oparta na wiedzy (G.O.W.) jako nowy paradygmat trwałego rozwoju, available at: http://instytut.info/wp-content/uploads/2016/08/Kuklinski. pdf, (accessed 23 May 2018). Lewicka D., Krot K., Książek D. (2016), Metodyczne aspekty badania zaufania w naukach o zarządzaniu, Kraków: Zeszyty Naukowe Uniwersytetu Ekonomicznego w Krakowie 7(955): 41–56. Lewicka-Strzałecka A. (2003), Zaufanie w relacji konsument-biznes, Prakseologia, 143: 195–208.

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Nikowska A. (2011), Sezam przedsiębiorstwa, Personel i Zarządzanie, 10: 46–48. Nonaka I., Takeuchi H. (2000), Kreowanie wiedzy w organizacji, Warszawa: Poltext. OECD – World Bank Institute (2000), Paris: Korea and the knowledge based economy. Making the transition. Penc J. (2001), Strategiczny system zarządzania. Holistyczne myślenie o przyszłości. Formułowania misji i strategii, Warszawa: Agencja Wydawnicza Placet. Perechuda K. (ed.) (2000), Zarządzanie przedsiębiorstwem przyszłości, koncepcje, modele, metody, Warszawa: Agencja Wydawnicza Placet. Skrzypek E. (2011), Gospodarka oparta na wiedzy i jej wyznaczniki, Nierówności społeczne a wzrost gospodarczy, 23: 270–285. Skrzypek E. (2009), Kreatywność pracowników wiedzy i ich wpływ na innowacyjność przedsiębiorstw, in: E. Okoń-Horodyńska, R. Wisła (eds), Kapitał intelektualny i jego ochrona, Warszawa: Instytut Wiedzy i Innowacji. Szałkowski A. (2002), Pracownicy a strategia organizacji, in: A.Szałkowski (ed.), Rozwój pracowników, przesłanki, cele, instrumenty, Warszawa: Poltext. Wierzbiński J. (2009), Badanie zaufania do organizacji: problemy metodologiczne, Warszawa: Wydawnictwo Naukowe Wydziału Zarządzania Uniwersytetu Warszawskiego. http://www.wirtualnemedia.pl/artykul/renesans-zaufania-polakow-do-instytucji-i-mediow-dramatycznie-zle-w-usa#, (accessed 15 May 2018). Iwona Gawron, PhD, is a doctor of economic sciences in the field of management sciences, senior lecturer at the Management and Tourism Department at the Economic Institute of the State Higher Vocational School in Nowy Sącz. From 2015, she has been the head of the postgraduate program “Human Resources Management”. Her scientific interests focus on the issues of business management, in particular human resource management and information management. She is the author of several dozen articles (as author and co-author) published in Poland and abroad. Sławomir Ziółkowski, PhD, is Assistant Professor at the Department of Management of Organizations, Human Resources and Economic Law at the Faculty of Management at the AGH University of Science and Technology in Krakow. In his research and didactic work, he deals with the issues of human resource management, in particular psychological aspects of managing human resources in the company, managerial negotiations and managing project teams. As a practitioner for years coordinating projects in large companies in the IT and media sectors, currently in his research, he is devoted to the subject of knowledge management – both in terms of organizations and transfer of knowledge and cooperation at the macro scale.

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Dalibor Šimek


Roman Šperka

e-mail: [email protected] Silesian University in Opava, School of Business Administration in Karvina, Czech Republic

Business process management implementation: The literature review and framework proposal for low process mature companies Abstract. In a time of a rapidly changing environment, companies are facing intern challenges, that are mostly connected to the way their processes are managed. At the same time, managers and employees responsible for adaptability, development or newly initiating projects are not prepared to react swiftly. One of the greatest barriers is the problem with the implementation of new Business Process Management (BPM) approaches. The aim of this paper is to systematically examine the literature and, based on these findings, to propose a framework for BPM implementation. So, this paper is divided as follows. After the introduction, there is a methodology part, where the research process is broken down. The next part is about the presentation of the literature review itself including a discussion about the results. Finally, the implementation framework is proposed based on the findings from the review. In the end, future work is mentioned. Key words: BPM; implementation; framework; life cycle; process maturity

Introduction There is a quantum of papers and research focusing on the adoption or implementation of process-oriented approaches such as BPM or workflow management (Rohloff, 2009; Brocke, Sinnl, 2011; Reijers, 2006; Škrinjar and Trkman, 2012; De Waal and Batenburg, 2014; Grisdale, Seymour, 2011). The meaning of the term framework is that it provides a conceptual structure to serve as a support or guide for achieving a desired goal. From the perspective of practical contributions, there has been only slight benefit, which stems from a generalization of the models available, so that these BPM

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implementation models (from the literature review) could be used in different industries and across all business sections. Trkman (2010) explained this situation with generalization in the BPM sphere by his statement, that due to the several contingent variables involved, any attempt to provide a definitive theoretical framework for dealing with BPM adoption and BPM critical success factors (CSF) is bound to fail. On the other hand, private consulting companies are developing their own frameworks based on the high amount of experience from their projects. With so many disciplines feeding into the concept of BPM, a universally accepted definition of BPM does not exist. However, pundits generally agree that BPM evolved from being a system (technology) oriented to a management practice, and is now a general discipline dedicated to a process-centric, customer-focused organization with goals of integrating management, people, process, and technology for both operational and strategic activities (Hill et al., 2006). As the researchers identified the most significant difference between the second and third wave of process management, as Smith and Fingar (2003) divided them, was a change in the implementation phase, which was greatly radical as the case studies from this period show (Davenport and Short 1990; Hammer and Champy 1993). By the end of a century, a lot of companies failed to adopt BPR, which was due to some great examples of very successful ones, like the one from Ford with account payable reengineering (Hammer and Champy, 1993). According to BPR literature, in a review conducted by O’Neill and Sohal (1999), companies undertaking BPR have used an IT strategy as a substitute for an integrated corporate change strategy. Gerrits (1994) says that in the literature on BPR, examples of successful BPR implementations are given. Unfortunately, the literature restricts itself to descriptions of the “situation before” and the “situation after”, giving very little information on the redesign process itself. Many firms in the United States and Europe undertook reengineering projects, but most proved to be overly ambitious and difficult to implement (Jeston, Nelis 2008). That is why the situation around radical process change has slowly stabilized giving space for a new approach to emerge. A so-called third wave of process-centric management called BPM started to develop at the beginning of the century. From the perspective of this paper, change in implementation approaches is what is of importance. Third-wave processes are inherently open to change; theorists call this “mobile” behavior. Mobile systems are systems whose participants freely communicate and change their structure (Smith and Fingar, 2003). One point of view is still the same, which is the human factor and its effect on the success of BPM initiatives.

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Implementation problems that do occur, appear to relate more to human than technology factors. But every methodology that deals with process management is a combination of some managerial approaches and technological tools and backgrounds. Mostly, there is some sort of change management technique and information management system, which is trying to get the company on the road to continuous process improvement. Although it is a well-known and largely used practice there is an ongoing discussion on how to implement Business Process Management for the best. Due to the comprehensive nature of BPM, a variety of different approaches exist (Rohloff, 2009) However, most of the papers failed to put their research within a theoretical framework. Therefore, BPM still remains largely a theoretical idea (Karim et al., 2007; Melão and Pidd, 2000). One of the causes could be methodologically poor research, which is often based on a single case study so the potential for creating peer-accepted generalism is harshly limited (Buh et al., 2013). On the other hand, another premise of one model fits all cases is denied. So, because of this, papers are aiming their focus on different parts of the BPM life cycle or on best practices from implementation projects (Reijers, 2006). The easiest approach to research process management implementation is through the study of critical success factors (Buh et al., 2015; Trkman 2010; Ravesteyn and Batenburg, 2010). These are, of course, important in the context of the whole implementation, but they don’t provide users with any sort of guidance. With BPM also the next acronym that is crucial for BPM implementation emerged – business process orientation (BPO). The definition according to Willaert et al. (2007) is related to the fact that as organizations accumulate efforts in process improvements, they gain experience and develop a process-oriented view. So, some organizations will be more mature in such a process view than others. In other words, BPO of an organization is the level at which an organization pays attention to its relevant (core) processes (McCormack, 2001). Process orientation or maturity is the next big variable that is entering into the implementation of projects, because the maturity of process orientation in a company influences the success rate of this type of project. Even the selected approach differs based on the process maturity level. The predecessor for BPM maturity or for business process maturity has been the Capability Maturity Model (CMM) design by the Software Engineering Institute in Pittsburgh. CMM originally presented five maturity levels. To derive from this model, Harmon developed a BPM maturity model. As Roeglinger et al. (2012) show in their review of maturity models, there are great similarities in research models. On the other side, the high amount of maturity models took their toll in terms of validity and reliability. Maturity models are

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not usually empirically validated and are simply based on case studies or the author´s experience (Škrinjar and Trkman, 2013). Another extreme form is that some maturity models are trying to be as comprehensive as they can be and then the problem of big complexity for implementation appears. The so-called BPM third wave didn’t evolve from a hype phase; there is a lot of new technology and approaches appearing such as robotic process automation (RPA) and cognitive intelligence that disrupts the whole industry. So, the next wave of process management slowly comes to the surface. The structure of this paper is as follows: after this introductory review, there is a methodology part, followed by the actual literature review which is the core of this paper and, in the end, a proposed framework is presented. In conclusion, a discussion is led.

1. Methodology The aim of this paper is to examine the literature and, based on these findings, to propose a framework for BPM implementation. According to Saunders et al. (2016), the first step in the systematic literature review is to formulate the review questions. So, for this review, the review questions are: 1. What are the phases of BPM implementation? 2. What are the activities in BPM implementation phases? 3. What similarities exist within the examined models? For a further understanding of a systematic literature review methodology, a definition from Denyer and Tranfield (2009, p.671) will be used. “Systematic review is a process for reviewing the literature using a comprehensive pre-planned strategy to locate existing literature, evaluate the contribution, analyze and synthesize the findings and report the evidence to allow conclusions to be reached about what is known and, also, what is not known.” A deductive approach to dealing with theory was set in this review. In the final phase, an implementation framework model is proposed as a result of this deductive review. So, this model is built from theory. Exploratory questions are likely to begin with “how” and “what” (Saunders et al., 2016). That being said, it is obvious that a systematic literature review falls into the category of exploratory studies. An exploratory study is intended to ask open questions to discover what is happening and gain insights about a topic of interest. More often, exploratory reviews and research

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fall within the qualitative research category. This is consistent with the authors’ philosophy of interpretivism, which was evolved as a criticism of the standard philosophy of positivism. Interpretivism sees the world and social reality from the viewpoint of the individual person, who considers scenarios in the real world that have been studied. First of all, after setting the correct key words and searching through scientific databases, the elements from classification studies methodology were used (Vessey et al., 2002). After the first searching iteration, a simple coding scheme was developed. It was based on the patterns that were seen in the publications. The basic structures of BPM implementation projects were divided into phases and each of them included key activities. Coding methodology is commonly used in analyzing qualitative data, such as interviews (Hruschka, 2004), but it is even widely adopted in reviewing literature (e.g. Recker and Mendling, 2016). In this paper, it was used in combination with the classic systematic approach. These two approaches contributed to each other. Two round data analyzing was conducted. The first round was the overall examination of papers and the search through the key words for implementation approaches that are structured in a suitable way for further analysis and comparison with other similarly structured approaches. At the same time, other key words were found through examining publications and papers, but these were synonyms. Nevertheless, they were accompanied in the further search too. For the needs of this review, the keywords were split into two groups: 1. Implementation: Adoption, a methodology for framework, change management. 2. BPM: Business process redesign, Business process improvement, Business Process Innovation, Business Process Reengineering. By scanning the searched results, the authors were mostly focused on the implementation approaches that are clearly and systematically split into consecutive phases and each of them is then dismantled in detail where activities and their description is obvious. This was a big filter for most of the papers, because only a few of them have the structure that the authors were searching for. For use of this review, a systematic approach of searching the literature was taken. Searching took place on the Google scholar, Web of science and Scopus databases.

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2. Literature review In this section, the literature review will be presented. As was mentioned in the methodology part, only literature discussing structured phases and activities in a successive way were picked. This was a hard criterion, because most of the reviewed publications did not pass it. A table with the six frameworks which were used for this review is in Appendix 1. They are structured into three columns – source, key activities, implementation phases. The framework in this concept is understood as a successive set of activities and phases arranged according to the time sequence. The first part of this review will discuss in detail selected implementation frameworks to provide better understanding even in terms of the broader context. The implementation case study from Rohloff (2009) builds on the solid framework from Siemens – Siemens Process Framework, which operates with the main part – Reference Process House (RPH) and other ongoing activities within the company. RPH contains the definitions of all processes and is structured into the following process categories: –– Management Processes; –– Customer Relationship Management (CRM) Processes; –– Supply Chain Management (SCM) Processes; –– Product Life Cycle Management (PLM) Processes; –– Support Processes. Each of these categories contains a number of standardized processes. The next part of RPH is process management methods, which our paper focuses on mostly. One of five relevant methods from this bundle is the Implementation Guide. The Implementation Guide is spread into five phases (levels) and each contains signature activities. Another important thing to consider if such a BPM program is implemented is the implementation topics such as: process management organization (determination of roles and responsibilities), process documentation, target setting and incentives, methods and tools selected, training, communication, performance and controlling and finally maturity assessment. These topics could be taken as areas of interest where success during implementation has to happen to develop through the process to maturity. So, these topics could be considered also as critical success factors from the authors’ point of view. Another implementation approach is adopted from Rosemann and Vom Brocke (2010). The implementation approach is called “Typical stages o BPM adoption”. Inspiration to use this approach comes from a paper from


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Buh et Al. (2015), where this approach is used as a basis for connecting CSF in a different stage of BPM implementation. The main part of this paper is a case study where CSF is classified according to BPM stages from Rosemann and Vom Brocke’s model. So, this approach, as can be seen in Table 1, is spread into five phases and Buh et Al. (2010), in their paper, show how Snaga’s adoption of BPM coincides with the framework. In this Snaga’s case study, the first phase was awareness of process problems and opportunities. It formed a desire to adopt BPM philosophy and the decision on BPM adoption followed. After the decision, the first true implementation phase was BPM education and training, BP modeling, analysis and redesign. The next phase was setting up the BPM office, defining the strategy and a plan for its execution. The final step was formed from ERP implementation, BP optimization, process performance measurement and BI implementation activities. Alignment between the BPM adoption framework phases and Snaga’s case study phases is obvious, which makes this framework even more reliable. Another BPM implementation approach was used by De Waal and Batenburg (2014) in their single-case study in Dutch insurance organizations. In this case study, the BPM project has an even narrower field of application, claim department. One can argue that this is really a specific case, from which no general conclusions can be drawn, but in this field, such a single-case study could provide valuable exploratory insights. The project in this case study is based on a BPM system implementation, which is often more IT oriented, but every new system that is set to place should be managerially implemented with the use of a validated methodology. The overall goal of the BPM system was also to achieve uniformity in case handling. One of the more demanding phases was the initial phase where the interdisciplinary team was working together and provided support and needed information for successful progress. An interesting method was used in this initial phase. The team was working in three streams. In the first instance, the streams worked independently, based on cycles of user sessions. During the user sessions, the deliverables were defined and retrospective feedback was given. After three sessions, the streams were brought together. This approach was used even in the modeling and layout of BPM system activity. The realization and implementation phase merely focused on finalizing and stabilizing the BPM system. The implementation project included activities and products required to deploy the artifacts into a part of the organization. The final phase then aimed to provide redesign capabilities and regular updates. Another activity was striving for scalability and extension across the whole department, which needed more involvement by end-users, who participated in follow-up development. Even the given specificity of this case study and little bit

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of a different focus (BPM system implementation) delivered another totally different point of view to the implementation approach which could contribute to the framework proposal part of this paper. The next described implementation framework is presented in a book called Business Process Management Practical Guidelines to Successful Implementation by Jeston and Nelis (2008). They both have practical experience of deploying BPM programs in a variety of businesses. Their approach is called the 7EE Project Framework. This approach towards BPM implementation is really complex and is broken down into 10 phases, each including a number of steps. Even with the comprehensive framework it has, it strives for broad applicability. It is structured in a sequenced way, but the authors are allowed to skip over steps or even whole phases according to the BPM project being realized. Implementation in their conception starts with a phase called the organization strategy, where alignment between organization strategy and BPM efforts is a prospect. This phase contains communication with the project team in order to understand and fully buy the company strategy. Process architecture is the next phase during which Business, IT and process architectures come together and try to work symbiotically. A correctly set architecture provides the project team with a foundation, forming rules and principles for designation of the process model and further realization of these processes. The launch pad phase is about finding the right spot in an organization where it is the best possible start for the BPM project and based on this important finding to a project team structure is established along with other governing principles (stakeholder involvement and management, expected business benefit and so on). As the name launch pad suggests, it forms the background for other phases when the first projects are starting out. So, organization strategy and process architecture together compose the launch pad for further execution of BPM projects. Analysis from different perspectives and the use of different tools is done in the understand phase. In this phase, not only are basic process metrics gathered, but the root-cause analysis is carried out to identify possible quick wins. These are essential for success mostly in lower process mature companies where support of key stakeholders is built directly through results obtained by quick wins. The most creative phase is often the innovate phase. After identifying various new process design options, testing through simulations and other validation techniques, this is realized. Another hugely important activity is to determine the implementation feasibility, which includes a forecast of metrics progression. The sixth phase is developed. This phase has been mostly known for its IT/software development and implementation, but it is only one part of this complex phase. It includes building infrastructure that will support people involved in the execution


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of the processes. The next phase is often underestimated and could put the rest of the project at risk if not handled thoroughly. It is the people phase in which people strategy and role design are proposed. It has nothing to do with change management tactics, because they should be carried out throughout the whole program. The implementation phase is about actual project rollout. After all the seven phases have been planned and prepared, the project is ready to run. Everything is pointing to this phase. It doesn’t have to be mentioned that this is the crucial part. It is not the end, though. The success of the project requires an additional two phases. The first is to realize value. Every stakeholder influenced by the project should realize the value which the project brings. Elements of this phase are stretched across all the project, but the significant part should come in this phase of the project. The last phase is sustainable performance where outcomes and all the work up to this point are connected to a system of sustainable effort undertaken through the process life cycle. Also, the conversion from a project to a business operational standard activity is done here. Another analyzed approach is Chang´s (2006) Business Process Management Implementation Methodology published in his book called BPM Systems, Strategy and Implementation. The book is more IT oriented, but it also includes an implementation part in the last section of the book, which is the logical culmination of turning principles and know-how into reality. Thus, the complex implementation of BPM Systems into enterprises should be perceived as a BPM initiative and that’s why this methodology is also embedded in this paper. The whole methodology is split into six phases. The first two are organized as the following phases and the rest of the four phases are arranged in the circle, which starts with the phase analyze; design and implement phases follow and the last part is a support phase. From the support phase, it returns to the analyze phase where it iteratively continues on and on as a classical BPM life-cycle. This practice of repetitive cycles forms the outline of each process management project. Each of them contains a cycle of these four phases. The first phase called “commit” is referencing to the creation of conditions, unite executives to build support for the BPM initiative, link strategic business goals to BPM and to contemplate process management as a management guiding principle. In this phase, the adjustment of organizational structure is also required, often containing the creation of a BPM organizational unit, led by an executive called the process czar. Lastly, in this phase, an employee reward strategy is re-articulated to focus more on process performance criteria. The research phase work is distributed from the strategy level from a previous phase on to the process management organizational unit

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(project team). The first research activities aim to catalogue existing business processes, then identify the core ones and prioritize them to meet the criteria for process management implementation. The next set of activities is all about establishing process management technology infrastructure where the committee is organized to select the right BPM system that will suit the needs of the organization. Evaluation of prototypes, built by different system vendors is needed, because it will prove not only their product and service capabilities but it will also serve as a first real taste of this type of technology for the process participants. In every BPM initiative, the change management techniques are necessary. That’s why in this phase, the training program for change leaders is established in the first place followed by hard skill training for a process design and BPM systems design tools. The first of the phases that is part of the iterative cycle of process management project is the phase analyze. Every project of this type should start with assembling the project team including assigning roles and responsibilities. In order to define the process problem, gathering of data from existing processes is necessary and of course analyzing them to determine their performance. The design phase is about optimizing and redesigning the current processes, involved in the particular project. Achievement of this type comprises a facilitating workshop to obtain business inputs and a draft of design alternatives, using tools such as simulations to pick the best one. After the correct design, an alternative is selected developing business logic and the overall solution prototype follows. Then, naturally, lots of testing and iterating improvements need to be done to complete the technical and logical functional design. In the implementation phase, the rest of the solution development is performed. Another focus is on completing technical documentation, conducting user testing and training. The last phase – support, is about delivering a report to the process czar containing process performance statistics. The support team also administers the up and running process management solution. The next methodology comes from Kettinger et al. (1997). It was published as a comprehensive survey of existing BPR methodologies, tools and techniques. The paper is supported by a strong research design split into seven steps drawn from a review of 25 BPR methodologies, semi-structured interviews with consultants and vendors to check the research design validation which was done on site. The reason why even the BPR approach is incorporated into this review is the fact that despite the critique of BPR, it has formed the foundation for BPM and, in a lot of ways, the implementation approach is similar as can be seen in the results of this qualitative review. This methodology is seen as a compound system of BPR approaches and in this review, it represents past approaches of BPR which can´t be forgotten.


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The first stage called envision typically involves top management, because gathering support and commitment from top stakeholders of the company is needed. Another activity is aimed at the discovery of opportunities which ultimately leads to the selection of suitable implementation processes. The initiate phase encompasses the assignment of a project team, setting the appropriate goals and additional project planning. The diagnose stage takes care of process discovery and its documentation. Analyzing is performed by the use of different tools, such as root-cause diagnosis. Redesigning is about creating new process design concepts that fulfill the HR and top management objectives. Documentation and prototyping are done at this stage too. Even the IS supporting process change is developed in this phase. The reconstruct stage heavily relies on change management techniques. Migration to the newly designed process and IT is realized, including training of process participants. Overall evaluation is done in the final stage, also with the linkage to continuous improvement programs.

3. Review summary In the review above, several different approaches of how to adopt BPM for the enterprise were described. They ranged from more classical and more broadly oriented BPM frameworks to the more specific BPM system implementation approaches which were presented. They could be seen more as IT oriented projects but also strongly connected to the essence of BPM tools and techniques of implementation. The last-mentioned approach is a bit older and it falls into the category of BPR. Every reviewed approach starts with some sort of strategy activity that incorporates top management and it is about alignment between company strategy and the intended BPM project, and about goal settings. As could be seen in a BPM life cycle review (de Morais et al., 2013) there is a low presence of strategy activities and steps in BPM life cycle models, which is another downfall of these types of life cycles and they can´t be taken as reference models for BPM implementation because of that. The next phase was mostly some sort of assessment of the current state (analyzing) and creating a process architecture. This architecture contains a set of research activities in order to select the right process for pilot implementation. To see this, one needs to look at the activities column of the table in Appendix A because in some reviewed publications analyzing or research activities are in phase with strategy alignment (Kettinger et al., 1997).

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Another set of activities in this phase includes obtaining information, process modeling, analyzing the IT infrastructure and identification of process improvement opportunities. Elements of analysis are spread even over to another phase (Jeston and Nelis, 2008) but the most recurrent pattern in the next phase is the presence of some sort of planning activities including the creation of an implementation plan, preparation activities including setting up, training and lastly, assembling of the project team. For some reviewed frameworks, the number of phases is different and therefore the authors can´t follow the strict succession and they have to analyze at the level of activities. After analyzing all sorts of input information the creative or innovative phase comes into place. Every examined approach has some type of creative activity where new process designs or prototypes are outlined. Testing with process participants or users and iterative improvement (Chang, 2006) is done afterwards as a way to determine which of the created possibilities is the best suited for another phase. This could include a pilot run as described in a paper by Rohloff (2009) or some quantitative techniques such as simulations (Jeston and Nelis, 2008). The most common and misleading phase of implementation comes after. It could be misleading due to confusion with the word implementation, which could be seen in a different context as will be described later. Again, every approach in this review has an implementation phase, in which IS deployment and the implementation plan is realized. This phase is often accompanied by the creation of training documents and by staff training itself. The last phase that appears in every paper is evaluation where results of the implementation phase are examined. Comparison between a plan and reality is crucial for assessing the success of a BPM project and, of course, for possible future projects as well. Activities, such as gathering process statistics, evaluation of process performance and finally further identification of process improvement are conducted in this phase. This last action can lead to another cycle of the same effort known as the BPM life cycle, but there is a need for a distinction between implementation approaches and the BPM life cycle.

4. Implementation approach vs. BPM life cycle The reason why the authors didn’t incorporate BPM life cycles into the review is that while implementation approaches included in this paper are created to guide users throughout the implementation process, the BPM life


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cycle didn’t serve this purpose. The BPM life cycle works only with a particular process. The selection and a lot of other foregoing activities are not contained. Another misconception causing a lot of discrepancies is the use of the word “implementation” because it is often a part of the BPM life cycle. It mostly refers to a phase where the preparations are done and it is time for launch. In the broader context of this paper, implementation focuses on the complex adoption of BPM instead of concentrating on one particular process. By complex BPM adoption we mean company initiative from the first contact up to the link to sustainable improvement efforts that are mostly running under the auspices of the BPM life cycle. The BPM life cycle is suitable for enterprises with higher process management maturity where the practices are broadly accepted and process-oriented thinking is deeply rooted within the culture, but companies with lower maturity have problems because they simply don’t know where to start.

5. Implementation framework proposal The reason why the authors see the need for another implementation framework is the fact that, according to Trkman (2009), most BPM initiatives have been unsuccessful and though there has been a growing interest in research in the area of BPM, research efforts often fail to put their results within a theoretical framework. One of the reasons why this is happening and why BPM science contributes only very little towards practitioners and companies (Adesola, Baines, 2005) is that the comprehensiveness of the BPM domain includes a wide array of practices without many guidelines for how to best implement them into real life (Rohloff, 2009). Another dimension, serving as a basis for the proposed framework is a level of process maturity. Every company could be included in the process maturity model, from which their competence for managing processes and level of process orientation arises. As Jeston and Nelis (2008) mentioned, the level of process maturity is really crucial for selecting a suitable implementation approach. The implementation framework proposed in this paper is created for companies in the lower levels of process maturity, which means the first two levels – initial and managed. As shown below, the proposed framework has a snail shape and it ends with a connection to the BPM life cycle, which could be selected pursuant to company situation or preference. In our model, we use the most common life

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cycle as a reference model from van der Aalst (2004). The great reputation and citations of this author are the reasons for selecting this life cycle. Figure 1. Proposed framework 12 8 4 11

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Proof of Concept Pilot

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Every line in the snail part of the framework means one particular phase or iteration including a lot of activities. Four phases form one level, which is an additional sphere having its own specification. The first level is perceived as a starting point called “initiating”, especially arranged for low maturity companies where the initial set of phases and activities are requisite for the understanding of BPM concepts. The inner circle of the proposed framework focuses on strategy alignment (1) which is a basic starting step as can be seen in the literature review. The next phase involves arranging the project team and fundamental training for team members to raise awareness of BPM (2). This phase usually takes place later in the reviewed literature frameworks, but they didn’t work with low maturity companies where providing suitable training is essential because the project team doesn’t have the appropriate skills and knowledge. After this, the phase of mapping and collecting (3) is ready to initiate. The goal of this phase is to map out resources and analyze the default situation to be able to come up with a realization plan. The last phase of this level aims to select the right process (4) for entry to the next level. It contains the discovery of business process, the creation of process architecture and the prioritization of these processes in order to pick the right one. The next four phases are covered by the proof of concept (PoC) level. This refers to a method largely adopted by software vendors, which becomes more relevant as the number of provided BPM technology solutions grows rapidly. As Jeston and Nelis (2008) said, PoC is a great idea to build a demonstration or prototype of the proposed process. That means the selected solution vendors are working towards, in cooperation with the internal project team, proves to have solution feasibility. A number of activities are preceded


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before the actual PoC, but it is certainly the culmination. The result is to not only test the proposed solution but to pick the right IT vendor to back it up. Phases in this level are: 1. Analyze/model – the aim of this phase is to analyze the entry process information in order to design the process model. As Chang (2006) mentioned, the iterative approach to design the process model is necessary because of the different sources of information ranging from hard data extracted from ERP or another type of software, to data collected via employee interviews. In a low process maturity company, the process models or any kind of semantics are most likely not present. 2. Redesign – is a highly innovative phase where an as-is process model is built into the to-be process model. The basic IT infrastructure is created to meet the company criteria, which have been discovered in previous stages. 3. Realize – in this phase, the actual PoC takes place. The first review and analysis of possible IT vendors for this kind of solution precedes this. It is essential to limit yourself to only a few best fits to suit need and to proceed with this vendor to PoC where the solution is built. It is possible that more than one PoC is realized in this phase. Higher orientation towards IT is common in this type of phase. 4. Evaluate – in almost every implementation framework and BPM life cycle, the set of phases is often ended with some kind of measure or evaluation activity. The project team analyzes the data from PoC and picks the right solution with the strongest results. The last level before heading into production and the BPM life cycle is the pilot level. Unlike PoC, the pilot is broadly adopted and used in reviewed approaches (Rohloff, 2009; Chang, 2006). It could be a replacement or misinterpreted as building a prototype, which often happens in the testing phase. This was represented in the PoC level. The pilot is about real-time scenario testing with the presence of actual process participants to validate the solution not even from the IT site (PoC) but even from the employee point of view because they will operate most of the time within the proposed solution. Phases in the pilot level are similar to those in the PoC: 1. Analyze/plan – analyzing at this level is focusing on human resources and, of course, the plan creation for the whole pilot test. 2. Training – as was mentioned before, this phase relies on the process participants. Appropriate training assures greater acceptance and understanding of the technology solution by process participants.

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This phase is different from the training in the initiating phase because training is focused not on the project team but employees, who will practically execute the process on a daily basis. 3. Realize – in this phase, the pilot implementation is done throughout the selected process. 4. Evaluate – retrospective evaluation is a tool here for achieving incentives and feedback for full deployment and additional life cycle runs, which follow. The proposed framework is created as a synthesizing of reviewed frameworks but in a qualitative manner. The main idea is that the BPM life cycle doesn’t provide implementation support or reference mostly for low maturity enterprises. The literature clearly states a lack of success not even in the BPR projects from the 1990s but even BPM projects from the near past. As Ravesteyn and Batenburg (2010) say, the question of how a BPM system can be implemented and what business value it can bring continues to be a white spot with a low level of quantitative research. This is one of the reasons why there is such a low number of implementation approaches in academic research and to dig deeper, one has to go to BPM practitioners. Our proposed framework has limitations, which will be the subject of future research where validation and iteration over this framework will be carried out. Creation of this framework can be understood as the first step in a long journey where the ultimate goal is to have a valuable and acceptable implementation framework.

Conclusions The aim of this article was to systematically examine the literature and, based on the findings, to propose a framework for BPM implementation. Based on this aim, three research questions (RQs) were asked. The first two were aimed at the systematic review where six appropriate papers with structured approaches were picked out and analyzed in terms of sequential phases each containing activities. The last RQ looked for similarities and was considered in the last part of this paper where a framework was proposed, based on the similarities from the examined approaches. The reason why the authors didn’t research simply the level of implementation where most of the other reviews (references) directed their focus is because, to explore it in more complex detail, one needs to go deeper into the process to see what actually happens to be able to provide tangible value


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for practitioners. Granularity between phases and key activities are, of course, varied, but the fact is that these phases and and activities are most of the times reproduction of qualitative research. The granularity in examined frameworks is so scattered that it often happens that from an activity a phase arises and vice versa. Most of the similarities were spotted in the first phases where strategy alignment and other preparation tasks were executed. The comprehensive approach from Jeston and Nelis (2008) was the only one to mention possible different approaches for low process maturity companies; the rest of the examined frameworks didn’t work with this premise. This doesn’t mean they are useless for authors of the reviewed framework because they provide a general view on implementation approaches which is valuable. Specialization of implementation frameworks is requisite because the idea of one model fits all presents serious limitations in practical use. Our proposed framework uses one of the levels of how to specialize and this is through process maturity. Enterprises with a lower level of process maturity don’t have many possibilities when they decide to increase process orientation and they can´t find the right approach in research articles. The implementation approach proposed in this paper is unique due to its focus and the authors see a great potential for the future validation of this framework proposal. However, there are some limitations in the proposed framework and it must be taken as being in a pre-stage, which will be used for validation with primary research. This will most likely lead to adjustment of the framework based on feedback from practical cases and it will bring it closer to the conditions of real applicability.

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Appendix Paper Advances in business process management implementation based on a maturity assessment and best practice exchange (Rohloff, 2009)

Key activities

Implementation phases

Clarify process improvement goals, clarify costs Set Goals, Analyand benefits, agree goals, costs & benefits; asse- ze, Define, Realiss ‚as is’ process, identify process improvement ze, Review levers, define target process, align process interfaces, define process implementation plan, approve target process and implementation plan; set up & run process pilot, evaluate and adjust target process, implement target process; assess and approve process performance, identify improvement potentials

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Chapter 2. Management of the company Implementation phases

Paper

Key activities

Handbook on business process management 1: Introduction, methods and information systems (Vom Brocke, Rosemann, 2014)

Training and education of employees, recruiting a champion, gaining influence by business drivers and champions within the company; finding a trigger for BPM adoption; setting up, executing and monitoring of individual BPM projects, process modeling and improvement; design overall BPM methodology, strategy and roadmap for execution; creating BPM Centre of Excellence to encourage process thinking, process performance measurement, introducing process ownership

Awareness and understanding of BPM, Desire to adopt BPM, BPM projects, BPM program, Productization of BPM

The process and structure of user participation: a BPM system implementation case study (De Waal, Batenburg, 2014)

Business Design, Architecture and Technique, crossfunctional workshops; modelling and layout of the BPM system definition of the database and its coupling to external systems, setting up communication structure,training, the definition of teams, the installation of the implementation team, initial deployment and support at the location; upgrade and redesign towards scalability, end-users involvement in development

Definition and Design of BPM system, Realization and Implementation of first stage of BPM system, (Re) design and Realization of second stage of BPM system, Implementation of second part of BPM system, Use and updates of BPM systém.

Business Process Management Practical Guidelines to Successful Implementation (Jeston, Nelis, 2008)

Analyze internal, external aspects, make a strategic choice, determine impact on processes, establish strategic measurements, complete the plan; obtain information, obtain process models, obtain technology principles, consolidate and validate, apply the architecture; stakeholder identification and interviewing, executive workshops, develop implementation plan, define project team, understand workshop, root cause analysis, identify innovative priorities and quick wins; stakeholder focus group, simulations, capacity planning, process gap analysis; activity definition, role design, design organizational structure, people training, determine BPM components, software/hardware development or buy, testing

Organization strategy, Process Architecture, Launch pad, Understand, Innovate, Develop, People, Implement, Realize value, Sustainable performance


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Implementation phases

Paper

Key activities

Business Process Management Systems, Strategy and Implementation (Chang, 2006)

Set strategic direction, effect organizational alignment; determine current business processes, establish process management technology infrastructure, prepare organization for change; assemble project team, deliver project charter, perform process analysis; optimize business process design, build process prototype, complete detailed solution design; develop programs and the user interfaces, conduct unit testing, multiple-iteration integration tests, design training documents, user training; monitor process performance, gathering process statistics, validating solution design, managing the process.

Commit, Research, Analyze, Design, Implement, Support

Business Process Change: A Study of Methodologies, Techniques and Tools (Kettinger et al., 1997)

Establish management commitment and vision, discover opportunities, identify IT levers, select processes; inform stakeholders, organize teams, conduct project planning, determine process customer requirements, set goals; document existing process, analyze existing process; define and analyze new process concepts, prototype new processes, design HR structure, analyze and design IS; reorganize, implement IS, train users, process cut-over; evaluate process performance, link to continous improvement programs.

Envision, Initiate, Diagnose, Redesign, Reconstruct, Evaluate

Dalibor Šimek is Ph.D. student in the Department of Business Economics and Management at Silesian University in Opava, School of Business Administration in Karvina, Czech Republic. He is participating as a head researcher or research team member in projects funded by the Silesian University Grant System, the last of them focusing on Advanced Methods and Procedures of Business Processes Improvement. His field of expertise is Business Process Management, implementation and deployment of Business Process Management Systems; modern workflow and automation tools such as Robotic Process Automation. Roman Šperka is an Associate Professor and Head of Department of Business Economics and Management at Silesian University in Opava, School of Business Administration in Karvina, Czech Republic. He holds a PhD in “Business economics and management” and Dr title in “Applied informatics” since 2013. He has been participating as a head researcher or research team member in several projects funded by the Silesian University Grant System or EU funds. His field of expertise is business process management, process mining, implementation and deployment of information systems and software frameworks; the use of agent-based technology in social sciences; modelling and simulation in economic systems and financial markets.

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Grzegorz Kunikowski

e-mail: [email protected], Poland

George Nezlek

e-mail: [email protected] Warsaw University of Technology, Poland

Christian Trefftz

e-mail: [email protected] Grand Valley State University, USA

Voronoi diagram modeling for defining developing energy markets Abstract. Secondary energy markets will ultimately be an integral component of the evolving set of strategies to provide cost-effective and environmentally-responsible solutions to meet the growing energy demands of nations in the Baltic Region. Among the issues that must be addressed in creating these markets is how to best model the various and inter-related dimensions of the markets, the technologies, and the environmental requirements which must be simultaneously satisfied to obtain the desired results. Voronoi diagramming is a modeling approach frequently used in studies of related communities. In this paper, the authors demonstrate the applicability of this approach to the problems of defining and implementing secondary energy markets for the Baltic Region. Key words: Voronoi diagram; Baltic region; modeling approach

Introduction Finding acceptable solutions to the ever-increasing demand for energy poses a series of complex, inter-related and multi-faceted problems. In addition to the underlying technologies, both currently in use and those being developed, there are numerous demographic, environmental, social and political dimensions which will affect the assessment of problems and the viability of potential solutions to them. Energy demand presents itself in many forms. Examples include residential v. commercial requirements, personal v. community needs, transportation v. environmental v. production, etc., and many other

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variations could readily be imagined. Further complicating the situation is that many forms of energy demand may be considered interchangeable, such as generating electricity for heating a structure or charging a battery-powered vehicle rather than providing carbon-fueled versions of the same application. The trade-off between low-carbon technologies and energy costs will be moving towards cleaner solutions incorporating them in a form of combined systems that minimize transition-related risks and associated costs. Much of the contemporary energy infrastructure may be thought of as the result of large-scale, often publicly funded projects designed to capitalize on efficiencies and economies of scale. These would most certainly include the electric power grids that are found in developed nations. Citing the United States as an example, its transformation from a largely agrarian economy in the nineteenth century to the industrial super power it had become by the latter twentieth century was accompanied, if not facilitated, by the development of the grid and numerous rural electrification projects. However, the early twenty-first century has been characterized by transition from manufacturing-based economies to information-based economies, with significant implications for solutions that had been developed previously. As the analog processes for organizations are replaced by digital ones, demands for the quantity and quality of energy are significantly altered. In an analog production environment, a power grid demonstrating 99.9% uptime and reliability could be considered more than acceptable. In a 24x7x365 digital economy, that 0.1% represents a total of approximately 8 hours downtime per year, with the potential costs running into millions of US dollars, depending on the industries in question and the distribution of power disruptions. As total demand for energy increases, existing facilities are at, or in many cases beyond, the limits of their ability to produce enough energy to meet demands. Since the USA power crisis of the early 2000s, consumers in many (USA) markets have been aware of the recurring levels of blackouts, brownouts, and power rationing required to allocate insufficient resources to attempt to best satisfy prioritized excess demands. In the central portions of the EU, each winter brings a discussion of the environmental tradeoffs between providing heat and conserving energy. These sorts of problems have environmental and political implications as well as technological ones. A recent NY Times article pointed out that: “Poland has some the most polluted air in all of the European Union, and 33 of its 50 dirtiest cities…” and that “…80 percent of the private homes in the EU using coal [for fuel] are in Poland.” (Nabrdalik and Santora, 2018) Clearly, an expansion of Poland’s energy infrastructure based on fossil-fuel driven technologies is likely to be in conflict with environmental goals, but a reluctance to rely

G. Kunikowski, G. Nezlek, Ch. Trefftz: Voronoi diagram modeling for defining...

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on cleaner-burning gas piped in from the former Soviet Union to the east is, at the very least, understandable in a political and historical context. As the energy distribution networks and power grids currently in use approach obsolescence and eventual retirement, in becomes clearer that a single, large-scale public works type of approach may not be the best possible solution in the future for problems of this complexity. Increasingly, the concepts of public-private partnerships, with distributed and micro-grids, and other alternatives to traditional thinking are gaining broader acceptance, and the growth of secondary energy markets and energy service companies to service those markets in the EU is being observed. The Baltic Sea Region (BSR) formally includes Denmark, Estonia, Finland, Latvia, Lithuania, Poland, Sweden, and portions of northern Germany, with additional partnering on some projects potentially including Norway, Belarus and the northwest (Kaliningrad) region of Russia. Throughout the BSR there is considerable variance in the level of acceptance and success of these secondary market models. There is not one single explanation to account for that variance. In Sweden, procurement procedure rules and legislation relating to the activities of municipal energy companies have been cited as a major barrier. In Poland, legal issues related to contracts, public debt, lack of interest and insufficient promotion are all thought to be of greater significance. Lithuania and Latvia have limited market activities at best, thus representing a relatively clean if unknown slate. At the other end of the spectrum, Germany has a well-developed and highly effective market with hundreds of participants. Consequently, although no two-member nations will have identical environments or experiences, Germany may, to a certain extent, serve as a role model for other BSR nations seeking to emulate their success. There are also numerous successful examples of secondary markets in the USA, Canada, and the UK. These include cooperation models, guidelines for investors, model contracts etc.

1. Modeling modern secondary energy market dynamics One of the first considerations in addressing this issue is to realize that a clean slate approach is called for. Killian notes that it is: “a perfect time to look at an energy supply portfolio comprehensively…renewables, resiliency,

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climate change, electric grid constraints, energy independence, and energy efficiency retrofits…the paradigm shift to sustainability goals has become a priority out of necessity, with brownouts, blackouts, and weather extremes showing the vulnerability in our energy supply.” (Kilian, 2014). The argument goes so far as to consider energy needs as a service requirement to be addressed by external agents, but that sort of virtualization approach cannot apply to the entire market chain of energy provision. Sooner or later, any modeling approach needs to take into account the actual producers and consumers as well as the channels of delivery. A comprehensive, clean slate approach to modeling contemporary as well as future energy markets would need to potentially include a combination of multiple energy generation and storage technologies. These would include, but not be limited to retrofitting of existing infrastructures, as well as: –– renewable power systems, either public or private; –– local generation such as combined heat and power (CHP) or fuel cell systems; –– micro-grids and storage systems (e.g. flywheels); –– time-of-day demand peak modeling (especially in conjunction with storage); –– multiple fuel option systems. This is in sharp contrast to the traditional model in which a (usually state-sanctioned) monopoly provider may have done little more than adjust rates for peak demand periods, and points to the idea that the number of technologies and other options involved justifies the creation of intermediaries – Energy Service Companies (ESCO) – to manage the effective utilization of energy resources for individuals and organizations as well as societies at large. Basically, the ESCO serves as an integrating broker, providing net energy resources to a client (individual, organization, region, state) for an agreed upon contract price. It is the ESCO’s responsibility to acquire the energy resources from whatever sources are available, and subject to constraints such as environmental requirements, etc. If the resulting cost of acquisition is less than the agreed upon rate, the ESCO realizes the difference as profit. In the opposite case, the ESCO suffers the loss, taking the technological and financial risk. Energy Service Company markets are created by organizations that offer energy performance contracts (EPC) or their subtypes to energy service providers. The following more formal definition is provided by the Energypedia


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Web Portal – “An ESCO (Energy Service Company) is a company dedicated to the provision of energy services. It basically refers to a natural person or legal entity that delivers energy services and/or measures to contribute to the energy efficiency in the same facilities of the client. The payments of the provisioned services are made (partly or entirely) depending on the achievement of certain energy efficiency criteria and/or performance proposed criteria.” The ESCO model has been widely applied and is being successfully used in multiple locations around the world. It is recognized as a suitable instrument for implementing policies and practices to improve energy efficiency. In Europe, the Energy Efficiency Directive (2012/27/EU, 2012) sets specific requirements for promoting energy services markets (Art. 13) and calls for member states to improve market efficiencies. The strong economic characteristics of the ESCO model and EPC contracts make these instruments economically viable and effective.

2. Voronoi diagramming The Voronoi diagram (Aurenhammer, 1991) is a fundamental data structure in Computational Geometry with numerous applications (Liu & Liu, 2004). Mathematically, one defines a Voronoi diagram as a partition of the real plane into k disjoint tiles. One starts with k different seeds and then one calculates each of the k tiles as the sets of points that are closest to each seed. In other words, the set of points in tile i is the set of points closer to seed i than to any other seed. The best sequential algorithm for calculating the Voronoi diagram in the plane is Fortune’s sweeping line algorithm (Fortune, 1987). The Voronoi diagram can be approximated using integers instead of real numbers. The coordinates of the points have integer values and so do the coordinates of the seeds. One chooses a particular size for the approximation, let’s say 512 by 512. This makes computing approximate Voronoi diagrams inexpensive and fast on computer screens. The figure below shows an example of a Voronoi diagram for five seeds. The seeds appear as black points. Every tile has a different color.

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3. Applying Voronoi modeling to secondary energy markets An ESCO that is interested in entering a secondary market faces a number of decisions: –– Where should any new production facilities be located? –– What should be the capacity of a new production facility (e.g. BTUs, megawatts)? –– How should the new production facility be connected to the grid or grids in the region? –– What are the expected sales to other companies in the area? When are those sales most likely to take place? –– What type of energy should be installed? –– Quality (reliability, MTBF) –– Cost (both to acquire and to deliver) –– Environmental impact (for when we might have to import clean energy rather than producing ‘dirty’ energy at home) In this paper, we shall concentrate on the first and third questions: where should production facilities be located and how should facilities be connected to existing grids. Both are instances of classical facility location problems in Operations Research, such as P-median, covering and hierarchical problems (Farahani and Hekmatfar, 2009). We start with the assumption that a geographic area of interest has been partitioned among several providers / sources and that the distribution of these areas can be approximated using a Voronoi diagram. The seeds


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of the corresponding areas could correspond to production sites or sub-stations that are used to distribute energy to a particular area. Given a set of seeds associated with existing companies or facilities, we propose that the location of a new facility should minimize the distance to the existing seeds. The underlying assumption of this heuristic is that the likelihood that the new facility will sell energy to any of the existing neighboring companies is the same. Mathematically, let Existingi denote the location of an existing seed, let k be the number of seeds, let New be the location of the new facility and let distance be a function that calculates the distance between two locations. Then the objective is to minimize

Ʃi=1,k distance(Existingi, New) A small and very simple example can illustrate, using Voronoi diagrams, the proposed heuristic. Figure 1 illustrates an existing system with four seeds and their corresponding Voronoi diagram.

Figure 1

Recall that the seeds are the black points that appear on the image. Where should a new production facility be located? The heuristic we propose suggests the middle point that creates the new Voronoi diagram as shown in Figure 2.

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Figure 2

The new location is equidistant to the existing seeds and hence it would minimize the cost of building transmission lines to those seed points. As stated, previously, this heuristic assumes that the probability of selling energy to any of the neighboring seeds is the same. If information is available about the actual probabilities of the neighboring seeds buying from the new facility, that information can be incorporated into the calculations for the new site. A very useful variation of this approach is the weighted Voronoi diagram, which can be used for this case. Every seed is given a weight and that weight is incorporated into the calculation of the distance. Intuitively, one wants to place the new facility at a location that is closer to the seeds of the most likely consumers. Tang et al., (2011) have applied this approach to the location of recharging stations for electric vehicles. We propose that a similar approach can be considered for defining secondary energy markets in general.

4. Sample applications of Voronoi modeling to secondary markets Consider a secondary energy market problem of demand analysis and market division based on supply. The six figures that follow illustrate how secondary markets might be defined and adjusted to best serve this market segment. Figure 3 represents the existing market structure with services provided to the shaded regions. Figure 4 adds unsatisfied demands to this total potential market. Figure 5 factors in the un-satisfied demands. Figures 6 and 7 overlay the base map with a Voronoi diagram framework. Figures 8 and 9 illustrate the final integration of new customers into a re-organized market.


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It is important to observe that the final arrangement of the market in Figure 9 may potentially re-allocate customers among different secondary market providers. It is not unrealistic to presume that the process of creating these secondary markets will not be a purely unregulated activity, and that a certain level of administrative oversight may be appropriate, at least when initially establishing these markets. While there may not be explicit mandates to assign individual users to specific secondary market providers, the suggestions for re-shaping markets to maximize their efficiencies may at least provide the basis for relevant negotiations.

Figure 3. Base map with selected polygons Figure 4. Demand distribution layer – where to allocate green “demand points”?

Figure 5. Already served demand as polygons with centroids (black triangular).

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Figure 6. Adding centroids in each corner.

Figure 7. Voronoi diagrams including “corner centroids”.


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Figure 8. Aggregated Voronoi polygons as the final allocation.

Figure 9. Final results including the base layer.

As a second example, consider the question of how multiple and independent energy generation sources should be interconnected (e.g. via a grid operator or an ESCO) to supplement an existing energy grid. As with the prior example, we begin by identifying the available resources with respect to their physical location (Figure 10). The next step is to create a Voronoi diagram to identify market segments (Figure 11). Next, we use the suggested boundaries of the segments as a recommended least-total-cost set of locations for a set of shared grid connections (Figure 12) resulting in the recommended

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placement of resources in Figure 13. We also note that the recommended solution may best satisfy the overall needs of the supplemented grid as opposed to maximizing the return for any individual producer within the set, but that is entirely consistent with the solution for the problem at the system level. The same logic can easily be applied to the case of aggregating demand rather than supply. We do not assert that these preliminary solutions would ultimately be optimal, but rather that they are sufficient as the basis for refinement to an eventual implementation.

Figure 10. Initial points.

Figure 12. Extracted nodes.

Figure 11. Generated Voronoi diagrams.

Figure 13. The proposed location of a line.

One of the particular appeals of the Voronoi diagramming approach is its inherently visual nature. There are a vast number of techniques that can be applied to resource allocation problems, from LP and MLP models, to GIS, to optimization modeling, etc., and we suggest that a (weighted) Voronoi diagramming approach can be used in conjunction with any or all of them, to facilitate visual comprehension of alternative configurations. Consider, as an example, a set of diagrams depicting existing market demands in blue and


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existing supply options in yellow. In a traditional media presentation based on transparent slides, the overlay representing satisfied demand would clearly appear as a visually obvious green region. But of equal importance, the areas of unsatisfied demand would be visually obvious as well. It should be equally apparent that there are any number of automated methods that could serve as an alternative to the visual metaphor we offer.

Conclusions The problems that will be encountered in defining and implementing secondary energy markets in the BSR, as well as integrating ESCO into larger energy grids, are complex and multi-faceted. Depending on the specifics of the regions in question, different factors will be of greater or lesser import in creating and growing secondary energy markets. We do not suggest that we have discovered a universal method for addressing all of these factors or their many potential interactions. We do suggest that weighted Voronoi diagramming offers a potential means to more readily visualize the various aspects of these potential markets and the consequences of their configurations, allowing for more effective planning and decision making in the processes related to their evolution.

References Aurenhammer, F. (1991), Voronoi diagram – a survey of a fundamental geometric data structure, ACM Computing Surveys (CSUR) 23(3): 345–405. Boza-Kiss, B., Bertoldi, P., Economidou, M. (2017), Energy service companies in the EU: Status review and recommendations for further market development with a focus on Energy Performance Contracting (EUR - Scientific and Technical Research Reports). Energy Access Web Portal: https://energypedia.info/wiki/ Portal:Energy_ Access., (accessed 11 December 2018). EU (2012), Directive 2012/27/EU of the European Parliament and of the Council of 25 October 2012 on energy efficiency, amending Directives 2009/125/EC and 2010/30/EU and repealing Directives 2004/8/EC and 2006/32/EC Text with EEA relevance. Official Journal of the European Union L.315/1. Farahani, R.Z., Hekmatfar, M. (2009), Facility location: concepts, models, algorithms and case studies, Berlin: Springer Verlag. Fortune, S. (1987), A sweepline algorithm for Voronoi diagrams, Algorithmica, 2(1– 4), 153–174.

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Frank, A. (2008), ESCOs and utilities: shaping the future of the energy efficiency business, GreenBiz, 13 April. Garnier, O. (2014), D2.6 EU Summary report documenting the collected information on recommendations for EPC markets (Transparense – IEE project). EEVS Insight Ltd. Graz Energy Agency & Berlin Energy Agency (2014), Facilitators guideline for energy performance contracting (European Energy Service Initiative – EESI2020). Hannon, M.J., Bolton, R. (2015), UK local authority engagement with the energy service company (ESCo) model: key characteristics, benefits, limitations and considerations. Energy Policy, 78(Supplement C): 198–212. Killian, E. (2014), The emerging business model of energy-as-a-Service (EaaS)” CX Associates, April 24, available at: https://buildingenergy.cx-associates.com/theemerging-business-model-of-energy-as-a-service-eaas, (accessed 11 December 2018). Liu, J., Liu, S. (2004), A survey on applications of Voronoi diagrams, Journal of Engineering Graphics, 2: 125–132. Nabrdalik, M., Santora, M. (2018), Smothered by smog. Polish cities rank among Europe’s dirtiest, New York Times, April 22. Soletek OU (2013), Utilizing the ESCO business models. Market study report, Invent Baltics OU, available at: http://soletek.eu/wp-content/uploads/2015/12/Market_ study_-_Smart_Heat.pdf, (accessed 11 December 2018). Stuart, E., Goldman, C., Larsen, P. Gilligan, D. (2014), The U.S. ESCO industry: recent trends, current size and remaining market potential, 2014 ACEEE Summer Study on Energy Efficiency in Buildings, 3: 283–300. Suhonen, N., Okkonen, L. (2013), The energy services company (ESCo) as business model for heat entrepreneurship – a case study of North Karelia, Finland, Energy Policy, 61: 783–787. Tang, X., Liu, J., Wang, X., Xiong, J. (2011), Electric vehicle charging station planning based on weighted Voronoi Diagram, Proceedings 2011 International Conference on Transportation, Mechanical, and Electrical Engineering (TMEE) (pp. 1297–1300), 16–18 December 2011, Changchun, China. Grzegorz Kunikowski is an Assistant Professor at the Faculty of Management at Warsaw University of Technology, where he earned a PhD in Management Sciences. His research interests include energy economy, energy security and crisis management. George Nezlek earned a PhD in Management Information Systems from the University of Wisconsin Milwaukee. Dr. Nezlek most recently served on the faculty of Warsaw University of Technology as a Visiting Professor, and is now retired after over three decades of service to the academic community.


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Christian Trefftz is an Associate Professor at the School of Computing at Grand Valley State University in Allendale, Michigan, USA. He earned a Ph.D. in Computer Science at Michigan State University. His main research interest is the application of parallel processing to computationally intensive problems.

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Chapter 3.

Marketing in the Organization 1. George Lazaroiu, Viera Valjaskova: Branding via green marketing: New trends in contemporary managerial practice 2. Margareta Nadanyiova, Lubica Gajanova, Dominika Moravcikova: The impact of personal branding on the customer value-based pricing strategy 3. Kristína Predanocyová: Consumer behavior on the Slovak market for meat and meat products 4. Ludmila Bahmane, Alexander Demin: Instruments of a transmarket approach in building an innovative marketing strategy

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Chapter 3. Marketing in the Organization

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George Lazaroiu

e-mail: [email protected] Cognitive Labor Institute, New York City, USA

Viera Valjaskova

e-mail: [email protected] University of Zilina, Faculty of Operation and Economics of Transport and Communications, Zilina, Slovak Republic

Branding via green marketing: New trends in contemporary managerial practice Abstract. Brand management practice, in order to achieve the continuity of building and managing its value, requires continuous incorporation of progressive marketing concepts. One of them is green marketing, which is capable of creating and cultivating the brand’s competitive potential in the context of the environmental pillar of socially responsible brand behavior, with regard to its externally proclaimed coherent identity. In the process of implementing this trend in brand management on the national market, it is primarily necessary to take into account its psychographic specificities. It is the absence of such a conception of the issue in the professional literature, because the incorporation of green marketing activities into the process of building and managing brand value itself is an innovative concept based on a uniform look to modify the green marketing postulates so that they are consistent with brand management strategies. The aim of this paper is to enrich the theory of green branding with the aspect of national psychographic specificities and to create a matrix of green marketing strategies for a specific market. Key words: brand; branding; brand value; CSR; green marketing

Introduction Green marketing is a progressive tool for managing competitive advantage (Prothero 1990; Peattie, 2001; Ottman, 2011 in Lewandowska et al., 2017). Generally speaking, it can be defined as the company’s commitment to carrying out marketing activities that aim to create, stimulate and maintain environmentally oriented consumer behavior and attitudes (Jain et al., 2004 in Lewandowska et al., 2017). The issue of green marketing is much more complex and goes beyond many traditional management concepts that need

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to be reviewed under its influence in order for optimal management of the competitive advantage. One of these concepts is also the traditional model of building and managing the brand value of Aakera (2017). However, the application of incorporating green marketing activities into brand management complicates the theoretical ambiguity of the very essence of the CSR concept and the current uniform approach that does not sufficiently take into account the specificities of the regional environment. The variability of the definition of green marketing is highlighted by Groening et al. (2018). He states that, according to Stanton (2017), green marketing is looking for ways to bring business activities to a new and harmonious relationship with nature. Stocchi and Fuller (2017) also quote green marketing as the process of planning, implementing, developing, awarding and distributing products in a way that meets three criteria: meeting customer needs; meeting business goals; bringing the whole process together with the ecosystem. It contrasts with Liu et al. (2012) who identify green marketing with satisfaction of the needs of socalled green consumers and with the support of organic products. However, the strategic dimension of green marketing is addressed by Dangelico et al. (2017), followed by Lewandowska et al. (2017). These authors analyze the process of meeting green marketing goals over the product lifecycle. However, a comprehensive view of the issue of using green marketing as a tool for building and managing brand value in terms of regional market specificities is still absent in the literature. This deficiency is negatively reflected in the resulting competitive potential of brands implementing green marketing as a tool for building and managing their value, which ultimately casts doubt on the theoretically proclaimed effectiveness of green marketing in brand management.

1. Theoretical background & literature review Green marketing is an immanent part of corporate social responsibility. Waddock (2004 in Kim et al., 2018) defines CSR as a broad range of strategies and activities that society is pursuing to address and build on relationships between stakeholders and the surrounding environment. Also, Carroll (1979 in Tran, 2018) talks about the concept of socially responsible business within which companies integrate social, environmental and health interests into corporate strategies and stakeholder relationships on a voluntary basis. It encompasses the economic, legal and ethical expectations of a business at a given time in order to maximize the synergic effect of the corporate

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citizenship. Despite the growing importance of CSR, there is little agreement among scientists on the relationship between CSR motivation and its influence on the value of shareholders in the context of building and managing brand value (Margolis et al., 2007 in Byun et al., 2018). Traditional views are consistent with the fact that CSR is reflected in managerial preferences as well as in company costs (Hon et al., 2012; Di Guili et al., 2014; Masulis et al., 2015; Cheng et al., 2016 in Byun et al., 2018), and therefore the responsibility of the business should still be primarily to maximize its profit (Friedman, 1970; Byun et al., 2018). On the other hand, there are claims that indicate that CSR brings value to shareholders in building a good reputation (as capital) between customers, employees and other stakeholders (Bénabou et al., 2010; Deng et al., 2013; Ferrell et al., 2016 in Byun et al., 2018). This is the concept that plays a key role in the context of detecting new trends in building and managing brand value in view of the findings of Moravcikova et al. (2017) who identify regional disparities in consumer perceptions of individual CSR pillars as prospective sources of competitive advantage. They also state that, in spite of variability, the dominant pillar of CSR in terms of potential marketing implications, is the environmental pillar, thus verifying the importance of green marketing as a separate area of marketing theory and practice. Joireman et al. (2016) provided a brief and modern overview of Contemporary Consumer Behavior with an emphasis on identifying the impact of CSR. Their research evaluates consumers in terms of four basic areas of behavior, namely: perceptions, goals and motivation, interpersonal relationships, and social issues (including CSR and green marketing as evaluated separately in his study). The fact that consumer behavior is deeply rooted in consumer consciousness means that it results in frequent subliminal rejection of not only socially responsible but also ecological products says Griskevicius et al. (2012 in Groening et al., 2018). Gleim et al. (2013 in Groening et al., 2018) also claim that consumers may have a skeptical view of green marketing brand activities, with the quality and availability of organic products and services. Groening et al. (2018), based on the above findings, offer a comprehensive overview of consumer behavior in green marketing in their article and for the first time, in professional literature, emphasize its importance in building a competitive advantage based on brand value. Although Wagner (2016) points out that environmental preferences have an impact on the consumer behavior forecast and on facilitating the implementation of the brand’s environmental policy, there is no answer to the question of why environmental-oriented consumers do not always buy in connection with their environmental beliefs. To examine this phenomenon Grimmer et al. (2016)

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identify relevant factors affecting consumer buying behavior and state that the effectiveness of green marketing strongly positively correlates with consumers’ subjectively perceived brand value. In the context of building and managing brand value the theory of green marketing orientation is essential, consisting of three dimensions: strategic, tactical, and internal (Papadas et al., 2017). It is the internal dimension that can be identified with the identity of the brand, which must be strictly declared in all brand building activities and brand value management. Such cross-sectional brand management activities are activities carried out within individual marketing mix tools, which must not only be in line with the claimed brand identity but also be environmentally compatible. Peattie (2001 in Dangelico and Pontrandolfo, 2010) states that the product is considered “green” when its environmental and social performance in production, use and liquidation has greatly improved, respectively, when it is constantly improving compared to conventional and competitive products. Ottman et al. (2006) emphasize that although no product has a zero environmental impact, the designation “organic or environmental product” is used to protect or improve the environment. These products save energy and resources, eliminate or reduce the use of toxic substances and reduce the amount of waste. The most common manufacturing strategies for organic products are: recycling; reuse of a product or part thereof; reduction of packaging; production of products that have a durable character; respectively, they are healthier, simple to repair, compost, and safer in transport (Mishra and Sharma, 2012 in Dangelico et al., 2017). In the case of green pricing, not only the quality of the product should be taken into account, but also the additional costs of its production, but the price should also reflect the willingness of consumers to pay for a product. Peattie et al. (2005 in Dangelico et al., 2017) justify a higher price for organic products with expensive material prices, higher costs associated with production constraints, or increased environmental costs resulting from international taxation. According to the European Commission statement (2014 and Dangelico et al., 2017), three quarters of the population of developed European countries are increasing their willingness to pay more for organic products. However, this is only happening to a so-called ethical critical point, after which the high price will no longer be appropriate to the benefits of such a product (Freestone et al., 2008 in Dangelico et al., 2017). Decisions about how and where to produce and sell are of particular importance for green products. Davari et al. (2012 in Dangelico et al., 2017) include in the green distribution method managerial tactics relating to distribution from production to consumption, and highlight the need for reverse logistics. Esmaili et al. (2015 in Dangelico et al., 2017) point to the internet


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and its key role in distributing green products and to the important steps to reduce the volume of packaging used in the production of green products and reverse logistics. Reduction of packaging can be achieved through integrated transport systems or, for example, with the help of the Internet, which reduces the negative impact of transport on the environment. By introducing reverse logistics, the company achieves cost savings; time savings; revenue increase; reduced inventory costs; improved inventory management and, last but not least, improved customer service (Polansky, 2011; Lee et al., 2012 in Dangelico et al., 2017). Prothero et al. (1997 in Dangelico et al., 2017) state that marketing communication has the most significant impact on the resulting effectiveness of a green marketing strategy. Green communication should highlight the benefits of these products for the environment; promote sustainable lifestyles; improve the environmental image of the brand and reduce the information asymmetry typical of organic products (D’souza et al., 2007 in Dangelico et al., 2017). Most consumers have a positive response to green advertising, although their potential is not yet fully exploited and greenwashing should be avoided. The negative impact of green advertising is mostly seen in businesses that mislead consumers and their activities negatively impact on the environment (Raska et al., 2015; Nyilasy et al., 2012 in Dangelico et al., 2017). The formulated marketing mix constructs in green marketing by its universal nature do not allow the exploitation of the full potential of green marketing in terms of brand management. This makes it necessary to take into account the regional specificities and the subsequent modification of green marketing concepts taking into account the state of the market. Hsu et al. (2013) refer to the Hofstede model of socio-cultural dimensions as the most appropriate sociological model of cultural specifics in terms of usability in economic sciences, which was created in the 1980s. The reliability and validity of this model in the context of current global changes was verified by Basnak et al. (2016). This model defines the socio-cultural profiles of the countries using six basic attributes, which are: 1) power distance; 2) individualism; 3) masculinity; 4) uncertainty of avoidance; 5) long term orientation and 6) indulgence. Mazanec et al. (2015), using this model, generally indicate the impact of the socio-cultural profile of consumers on their purchasing behavior. The influence of the national specifics on the perception of the value of the brand is determined using Hur et al. (2015). The influence of the national specifics on the perception of brand value is also confirmed by Hur et al. (2015). The Slovak Republic acquires values outside the mean values of the scale 0-100 (which are an indicator of the ambiguity of the characteristics of socio-cultural profile dimensions and therefore their usability

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in the context of marketing practice is low) in the dimensions “power distance” (100), “masculinity” (100) and “long term orientation” (77) – above average values and in the dimension of “indulgence” (28) – under-average values (https://geert-hofstede.com/, 2018). The regional specificities of brand management with a potential impact on the resulting effectiveness of green marketing are analyzed in the conditions of the Slovak Republic by Moravcikova et al. (2017), Nadanyiova (2016), Nadanyiova et al. (2015), Majerova (2015), Murin et al. (2015), Holly (2014), Szkurakova et al. (2014); Krizanova et al. (2014; 2015), Nadanyi et al. (2013). Nadanyi et al. (2013) analyzed the application of ecological marketing principles and the use of organic marketing tools in the business activities of selected Slovak companies. The identification of the relationship between Slovak consumers and environmental marketing activities was the aim of Majerova’s survey (2015) which, based on these findings, proposed general recommendations for the application of eco-marketing as a tool for competitiveness in the conditions of the Slovak Republic. Krizanova et al. (2014, 2015) modify the traditional Grant (2007) category of green marketing activities according to their goals and impact on consumer behavior as well as the lifestyle of the whole society. The applicability of green marketing strategies according to Danciu (2012) is verified in the conditions of the Slovak Republic (Szkurakova et al., 2014). Ottoman’s (1998) concept of green marketing strategies support constructive criticism with regard to their applicability in the Slovak Republic (Holly, 2014; Murin et al., 2015). Nadanyiova et al. (2013) state that when managers are choosing a suitable green marketing strategy, they should consider not only the size of the potential market sector, but also the so-called “Degree of green” factor, which represents the involvement of the enterprise in environmental protection activities and its distinction from competition. It modifies for the conditions of the Slovak Republic the theory of the extreme, defensive, shadow and lean strategy formulated by Ginsberg et al. (2004). Each strategy formulated in this way is characterized by a different degree of overlap of the traditional concept of marketing mix tools with the behavioral aspects of the buying behavior of an environmentally conforming consumer.


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2. Methods The aim of this paper is to identify the specifics of building and managing brand value through green marketing activities in the Slovak Republic. From a methodological point of view, the study is processed in the form of a case study examining the specificities of the Slovak environment of brand value management through green marketing activities, using not only primary but also secondary data. Secondary data are the values of Geert Hofstede’s socio-cultural profiles (https://geert-hofstede.com/, 2018). Primary data are obtained by realizing the original author’s questionnaire survey. The questionnaire survey was conducted by the CAWI (Computer Assisted Web Interviewing) by an external agency in the first quarter of 2018 on a sample of 2000 respondents. The main surveyed population was the population of the Slovak Republic aged over 15 years (acquiring legal personality according to valid Slovak legislation). The reason for this limitation was the requirement to ensure the autonomy of purchasing decision making and the real mirroring of the value of the brand in the economic behavior of the Slovak population. The structure of the surveyed sample was socio-demographically representative.

3. Results and discussion In the first part of the survey, we dealt with the attitude of the respondents to the green brands, as well as their perceptions, purchases and recognition. We found out that: –– In terms of product parameters, 47% of respondents compared common brands with the so-called green brands, but when they should choose, the decisive factor is the price for them; –– In the case of the price subjectively accepted by the consumer, the quality of the product is decisive in terms of the resulting purchase decision, rather than its image (57% of the respondents); –– For the majority of consumers, the difference in the price of the regular and green brand is acceptable at 10% for green labels (59% of respondents); –– Discounts are perceived by 38% of respondents as a symbol of quality reduction; –– 63% of respondents consider that green marks are better; –– The relationship of respondents to green brands is influenced by their surroundings (up to 65% of respondents).

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In the following part of the survey, we dealt with the real perception of green brands among Slovak consumers. The brands suggested to the respondents were selected based on their placement in Via Bona Slovakia 2017, where the PONTIS agency annually assesses brands according to their socially responsible activities, not only in general terms, but also at the level of individual pillars (social, economic, environmental). Other brands were supplemented by random selection as competitors in the industry. We found that for the “most green” businesses which protect the environment, the respondents identified brands in the following categories: –– Samsung (35%) and LG (29%) in the electronics category; –– Lidl (39%) and Tesco (27%) in retail; –– Orange (37%) and O2 (28%) in the category of telecommunication services; –– Slovnaft (41%) and OMV (29%) in the category of power engineering – gas stations. Depending on the subjectively perceived brand value, the order in each category was compiled as follows: –– Samsung (35%) and Panasonic (32%) in the electronics category; –– Kaufland (35%) and Tesco (24%) in retail; –– O2 (35%) and Orange and Telekom (both 27%) in the category of telecommunication services; –– Shell (37%) and Slovnaft (32%) in the category of power engineering – gas stations. By comparing the results, we can say that in the electronics category, in both cases, the Samsung brand, which is considered the smallest and the most preferred among the respondents, is in first place. The difference comes in second place where, according to respondents, the more eco-friendly is the LG brand, but Panasonic is more preferred. In the category of retail, Lidl and Tesco were considered the most efficient stores, but Kaufland ranked higher in preference, and second place remained unchanged – Tesco. The category of telecommunication services in the environmental field was represented by Orange and O2, which exchanged positions within the preferences and were joined by Telekom in second place. In the last category, the respondents selected Slovnaft and OMV gas stations as the greenest, but preferred Shell and this was closely followed by Slovnaft. On the basis of this comparison, we can generally conclude that respondents were more likely to agree on the choice of green and preferred brands,


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which verifies the suitability of building and managing brand value on the basis of green marketing activities. We were also looking for a similar link in the answers to the questions, that related to the identification of three factors influencing the perception of environmental conformity and the purchasing decision-making of respondents. While the most important factors are price (28%), quality (21%) and discounts (15%); recyclable packaging (31%), organic production (22%) and advertising (16%) determine the environmental conformity assessment. As a result, consumer choice is more strongly influenced by price (price and discount factors) and product policy (factors such as quality, branding, packaging, and product appearance). Product policy (factors like recyclable packaging, production ecology and functional parameters) and communication policy (an important advertising factor that accounted for only 7% of the purchasing behavior, but up to 16% for environmental protection) have a decisive influence on the environmental perception of the brand. Based on the above, we can say that product and communication policy as a platform for implementing green activities are decisive in formulating effective strategies for building and managing brand value in the context of green marketing. Based on these findings, it is possible to build on the basis of an intensity matrix of green marketing strategies for brand management (Figure 1). Figure 1. The matrix of green marketing strategies for brand management strong offensive strategy

stagna�on strategy

penetra�on strategy

defensive strategy

product policy

weak strong

weak communica�on policy


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Offensive strategy is financially difficult and time-consuming, suitable for brands with “green” leaders who want to maintain their leading position on the green market, or for existing brands that have decided to “green” their production and have enough money to achieve it. As a part of their product policy, they focus on constantly improving quality through green labeling and obtaining the necessary certifications, investing in new, more environmentally-friendly production facilities, recyclable product packaging, modification of the existing logo to a greener version, and similar invasive steps. About all of these changes, they constantly inform their regular customers and try to attract and convince customers of their green competitors in a new green market by usage of more intense communication policy, thus achieving a leading position in the green market. The defensive strategy is the opposite of the first one. This strategy is chosen by brands whose only purpose is to defend their position by achieving a minimum level of green standards and meeting the conditions for entry and staying in the green market. It is also suitable for brands entering the green market as a result of changing legislation or for brands that were forced to transform into green businesses, otherwise they would have had to exit the market. They make little effort in the field of communication policy, because they derive from a high interest in green products. This is also the case for the product policy, where most of the costs are related to maintaining the necessary quality of green labels, or possibly additional costs are associated with the adoption of new standards set for the whole green market. Penetration strategy is a strategy that allows you to move on to the green market through an intensive communication policy, driven by the whole marketing effort. Brands are trying to promote their products on the Internet, communicate with customers on social networks, work on suitable PR, present themselves through participation in environmental projects and competitions and try to become well-known to the public. Similarly to the defensive strategy, product policy is geared to achieving the minimum level of green market standards. Stagnation strategy is a strategy for the most powerful brands in the green market sector. It represents the maintenance of its strong position gained by brand by constantly innovated green products using the latest technologies in its production to fill existing gaps in the green market. The brand invests large amounts of funds in research and science and the purchase of increasingly modern and more efficient equipment. They sell their products at high prices that consumers accept because they are unique high-quality products. Therefore, their communication policy includes low-cost promotional activities and focuses mainly on communicating with loyal customers.


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Conclusions The aim of this paper was to create a matrix of green marketing strategies for building and managing brand value in a particular market. While formulating it, we assumed that the sources of the subjectively perceived brand value in the context of green marketing activities are not universal and vary within the specifics of national socio-cultural profiles. To achieve this aim, we used a case study of the impact of green marketing on brand management efficiency in the Slovak Republic. The data we used for the fulfillment of the set target came from our own survey carried out on a sample of 2000 respondents (citizens of the Slovak Republic older than 15 years), realized in the first quarter of 2018 by the CAWI method. We found that: 1) respondents were more likely to agree in the choice of green and preferred brands, verifying the appropriateness of building and managing brand value on the basis of green marketing activities, and 2) in the context of brand management, green marketing activities implemented within the framework of product and communication policy have a dominant position. We therefore state that, in the specific conditions of the Slovak Republic, green marketing is capable of positively influencing the value of the brand, provided that brand management will take these specifics into account in its decisions, primarily in the context of green brand marketing strategies. Acknowledgement The research leading to these results has received funding from the project entitled “Integrated model of management support for building and managing the brand value in the specific conditions of the Slovak Republic” in the frame of the programme of the Slovak Research and Development Agency under the grant agreement number APVV-15-0505.

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Moravcikova, D., Krizanova, A., Kliestikova, J., Rypakova, M. (2017), Green marketing as the source of the competitive advantage of the business, Sustainability, 9(12): 1–13. Murin, I. (2015), Green marketing as a tool influencing consumers’ behavior: Slovak case study of regional mark preference, Procedia – Economics and Finance, 34: 260–267. Nadanyiova, M., Kramarova, K. (2013), Green marketing and its impacts on consumer’s green purchasing behavior, in: Marketing identity: design that sells (pp. 423–435), Trnava: UNIV SS Cyril & Methodius. Nadanyiova, M., Kicova, E., Rypakova, M. (2015), Green marketing and its exploitation in Slovak companies, Procedia – Economics and Finance, 26: 219–226. Nadanyiova, M. (2016), Implementation of the green marketing principles in the Slovak automotive industry, in: Transport means 2016 (pp. 699–704), Kaunas: Kaunas University Technology Press. Ottman, J.A., Stafford, E.R., Hartman, C.L. (2006), Avoiding green marketing myopia: ways to improve consumer appeal for environmentally preferable products, Environment, 48(5): 22–36. Ottman, J. (2011), The new rules of green marketing: strategies, tools, and inspiration for sustainable branding. Sheffield, UK: Greenleaf, Print. Papadas, K.K., Avlonitis, G.J., Carrigan, M. (2017), Green marketing orientation: conceptualization, scale development and validation, Journal of Business Research, 80: 236–246. Peattie, K. (2001), Towards sustainability: the third age of green marketing, Marketing Review, 2(2): 129–147. Peattie, K., Crane, A. (2005), Green marketing: legend, myth, farce or prophesy? Qualitative Market Research: An International Journal, 8(4): 357–370. Polonsky, M.J. (2011), Transformative green marketing: impediments and opportunities, Journal of business research, 64(12): 1311–1319. Stanton, S.J. (2017), The role of testosterone and estrogen in consumer behavior and social & economic decision making: A review, Hormones and Behavior, 92: 155–163. Stocchi, L., Fuller, R. (2017), A comparison of brand equity strength across consumer segments and markets, Journal of Product and Brand Management, 26(5): 453–468. Szkurakova, L. (2014), Green marketing as opportunity for innovation, in: Marketing identity: explosion of innovations (pp. 494–511), Trnava: UNIV SS Cyril & Methodius. Tran, B. (2018), Corporate social responsibility, in: Encyclopedia of information science and technology (pp.671–681), Hersey, IGI GLOBAL. Wagner, K. (2016), Environmental preferences and consumer behavior, Economics letters, 149: 1–4.

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George Lazaroiu, PhD, is a Research Fellow at the Centre for Global Studies in Education, University of Waikato, Hamilton, New Zealand. He is also an associate professor at Spiru Haret University and Bucharest University of Economic Studies. He is a strategy editor for Educational Philosophy and Theory and Policy Futures in Education. He is a section editor for Springer and a publishing executive editor for nine journals indexed in Scopus. He is the director of the Social Science Research Unit at the Cognitive Labor Institute, New York City. Viera Valjaskova (nee Valachova) is a PhD student at the Department of Economics, University of Zilina. Her professional and research activities are focused mainly on the issue of project management and brand management. She regularly publishes in journals and conferences indexed in databases WoS or SCOPUS.

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Margareta Nadanyiova


Lubica Gajanova


Dominika Moravcikova


The impact of personal branding on the customer value-based pricing strategy Abstract. Personal branding as a marketing strategy brings together the name of a famous person with a product and thus positively affects brand identification for consumers, brand access and also brand confidence. The article deals with personal branding in the specific conditions of the Slovak Republic. By using methods of description, comparison, analysis and synthesis the essence of personal branding is defined. Based on the analysis and the results of the marketing survey, focused on the perception and influence of personal brands on Slovak consumers, measures were proposed for personal branding in the specific conditions of the Slovak Republic. Key words: brand; customer value-based pricing strategy; famous people; p ersonal branding; pricing

Introduction Recently, personal branding has been increasingly used by foreign and Slovak famous persons and brands. Whether they are well-known personalities, starting with their own brand or long-running brands, they are well aware that using personal branding will increase customer interest in their products (Harris and Mychel, 2017). The product policy, which includes brand policy, is inseparably linked to its pricing policy within the company’s marketing mix. And that fact gives us a reason to examine the impact of personal branding as one of the latest marketing trends on the product value perception of customers, reflecting the pricing strategy of companies based on customer perceived value.

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Literature review The issue of the brand, branding and personal branding is currently dealt with by many foreign and domestic authors. Kotler and Keller (2007: 125) define the brand as a further dimension of the product that distinguishes it from other products. They perceive the brand as the declared product quality. The brand is a name, term, sign, symbol, design or a combination thereof, which identifies the goods or services of one seller or group of sellers and differentiates them from competitors’ goods and services (Kotler and Keller, 2007: 127). The brand is of great importance for distinguishing the production from its competitors’ production. It is important to regularly find out how a brand is perceived by customers and what they are connecting with. The quality of the seller’s products and services is crucial for brand perception. The brand may also add product value. It has to be designed to be able to draw from it the usefulness and quality of the product, its pronunciation and memorability has to be simple, to be distinguishable from other brands and easily translated into other languages (Nica and Taylor, 2017; Bieliński, 2016). According to Jones (2017: 18) branding was claimed to be a science, art even, behind a dark corporate conspiracy. It was studied by economists, marketing experts, designers, organization specialists, psychologists, philosophers, social theorists and cultural critics. However, very few of these experts share a common view of what branding is and how it works. Healey (2008: 35) specifies branding as a process of constant struggle between manufacturers and consumers to define promise and meaning. According to him, people make their own decisions about how to be, how to live and what to buy, but within the circumstances created by advertising, marketing, and branding. Shopping behavior is predominantly driven by stories, emotions, and branding. Merz et al. (2009: 330) say that the importance of brands and branding in recent decades has developed. Furthermore, he notes that this development has got closer to the new conceptual approach, which looks at the brand in terms of joint activities of companies of all stakeholders and at the brand value in terms of the perceived value of collective stakeholders. Marketing managers can benefit from investing resources in building strong brand relationships with stakeholders and then building a philosophy on these bases. As reported by Taylor (2007: 42), in today’s increasingly complex world, with people becoming more and more busy and buffeted by the growing amount of information, the trusted brand is more valuable and useful than ever. And the key to building this trust is lasting and high-quality products.

M. Nadanyiova, L. Gajanova, D. Moravcikova: The impact of personal branding on...

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He also says that branding has already been transferred to celebrities, sports people, and television shows, for example, as in the positioning of Jamie Oliver, a television chef who has become famous for trying to heal dining in British school kitchens. According to Aaker et al. (2004: 1), who deals with brand personality through a longitudinal field experiment examining the evolution of consumer-brand relationships, findings suggest a dynamic construal of brand personality, greater attention to interrupt events, and consideration of the relationship contracts formed at the hands of different brands. Many marketers consider that the combination of celebrity or other famous person and brand positively influences identification of the brand among consumers, brand access and brand confidence. Personal branding, also known as personal marketing, can be understood as the application of communication and marketing techniques that are commonly used to advertise the product or company to consumers. In this way an individual becomes his own brand. The goal of this process is to encourage potential consumers or employers to show interest in the products or services of the person concerned and not others. What matters is no longer the product or service offered by this person, but rather his reputation and his professional identity. These are created and distributed primarily through the Internet and its most widely used communication systems, namely social networks. Generally, people prefer well-known brands in their purchasing decisions, because they create more confidence than unknown brands (Krizanova, 2015: 80). The brand value expresses how a particular brand can influence customer purchasing decisions, i.e. their subjective perception of the prestige, quality or characteristics of a particular product or service. The brand value influences its market power and market impact, helps to better differentiate itself from competition, increases customer loyalty and reduces vulnerability to market fluctuations. Goffman (1999: 25–58) uses the term dramaturgy as part of his theory of self-presentation. This term refers to the search for own personality as in the drama and the treatment of its activity as an actor in the game. It can be controlled by our peers and, in the case of celebrities or athletes, they can build a personal brand by using what they present to their audiences through various social media. The theory of own presentation and personal tag go hand in hand; we see celebrities and athletes who make a brand, or use social media such as Twitter, Facebook, Instagram and so on. Creating a personal brand is a big part of celebrity life and can help them spread awareness and also offer contact with the fans. As mentioned, this can

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be achieved through the use of social media. The theory of self-presentation focuses on how people look at their own identity and how they want to be seen or perceived. Famous people use these accounts as branding methods. They show people their lives and fans feel close to them, almost as if they were friends because they have connections through social media. Also, to attract more fans and to reach them as much as possible, many celebrities update their accounts on social media daily so that their link can be seen by more people. Social networks have provided people with a simple way to get their personal brand to a wider audience (Campbell et al., 2017; Pashkus et al., 2016). Social networks are part of modern social media. The popularity of social networking sites has been unusually large in recent years. Social networks connect individual users, facilitate interpersonal (though impersonal, mediated) contact and exchange of information. At the same time, the social networking system provides very sophisticated and effective space to implement marketing plans (Dorčák, 2013: 43–69). Fans can be very influenced by famous people, their political values and deeds, in part by expressing opinions through social networks. Creating online, internet fanclubs around famous people helps to increase their personal brand value. An example of successful personal branding and its impact on the consumer in the policy area are, for example, names like Donald Trump and Hillary Clinton that bring specific images to the minds of many, but these are only partly linked to groups with which the candidates agree. Donald Trump and Hillary Clinton are examples of people who have mastered the art of linking their names with their business and hobbies. They have both built a quality personal brand. However, personal branding is not just for politicians and entrepreneurs but also for famous people from the field of sport, art and so on. According to Nielson’s Consumer Survey, only 33% of customers trust information from the brand, while 90% trust the people they know. This means that the entrepreneur has a much greater chance of gaining confidence from customers if they first become familiar with them and encourage their employees to do the same (Lake, 2018). Van den Bergh and Behrer (2012: 81–112) on this topic said that a constant stream of updates on social networks and mobile phones for young people means they always have an overview of what their friends do and at the same time, thanks to social networks young people have never had so much life patterns as today. The media celebrate the young and the successful people, whether they are athletes, actors, singers or famous people from other fields. In 2005, the Kaiser Family Foundation came up with a very remarkable discovery. Overall, 31% of American teenagers were convinced that they


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would be famous once. Today a person who wants to become a celebrity has countless tools available: to become an audience member in a studio, a guest on a talk show, a reality show participant, appearing on YouTube or TV programs searching for talents such as Superstar, X Factor and so on. Famous people are becoming smarter in the area of the brand advantages that their star strength and strong influence provide them with during their career. They understand the importance and impact of personal branding and so they extend it to commercial branding. As a result, some celebrities have gone into business with fashion and accessories and some others are on the way. Successful cases include famous persons such as Jennifer Lopez, Sean Combs, 50 Cents, Eminem, Sadie Frost, Gwen Stefani, Pamela Anderson and Jessica Simpson, who own fashion or complementary brands. Kylie Minogue owns an underwear brand, Victoria Beckham recently started designing jeans and Elizabeth Hurley has had her own swimsuit brand since 2005. In addition, the list of celebrities who have launched his or her own perfume on the market has grown steadily, including Jenifer Lopez, Britney Spears, Paris Hilton, Celine Dion, Elizabeth Taylor, Naomi Campbell, David and Victoria Beckham and Antonio Banderas, along with many others (Okonkwo, 2007: 212–254). Based on the above, we can state that building a successful brand requires a good understanding of the needs and desires of the target group. Every marketing decision that applies to the market has its brand impact. In branding, all elements of design, graphic design, color range used and language or company are co-operating. Therefore, it is extremely important to speak the same speak, to use a consistent strategy and tactics that emphasize the desired brand perception in every contact with public. The seller cannot become a brand without becoming well-known. A well-known person can be an effective way to bring the brand to life, even though it is also a potential minefield. These famous people are very well aware of it and use their glory to sell products bearing their name – their personal brand (Healey, 2008: 165). The lifestyle brand, or so-called personal brand, is a visible expression of human values. These values oriented outward are sometimes called symbols of social status. By purchasing a given brand, it seems as though a customer purchases club membership, often exclusive, where membership is not for everyone. Of course, in this case, the emotional factor dominates in any image that is created and it requires a lot of work. First of all, a good product is needed. In addition, it helps if the brand has interesting story. But in this case, the story helps reinforce emotional values within the vision, not the other way around. In creating visions of lifestyle

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brands, the key to success is to remember that it is building a world of the emotional brand in which consumers reflect their ideas and dreams (Kliestik et al., 2018; Alshehhi and Olah, 2017). It is very important to attract attention and the biggest reward for a distinguished brand personality is the situation when consumers themselves tell the story of the brand. A carefully chosen famous person can create an emotional link to the brand, so it has to be attractive, which means that the consumer chooses it over competition that offers similar products at the same price (Tamulienė and Pilipavičius, 2017). In a case where the product- and brand-level variables are controlled for, brand trust and brand affect combine to determine purchase loyalty and attitudinal loyalty. Purchase loyalty, in turn, leads to greater market share, and attitudinal loyalty leads to a higher relative price for the brand (Chaudhuri and Holbrook, 2001: 81). An irreplaceable helper in deciding on prices is to draw up a good pricing strategy. The pricing strategy is a set of measures, instructions, procedures, and interventions that take place to promote certain product prices. Drawing up a pricing strategy requires a comprehensive marketing approach. Pricing should be understood as an element of marketing; prices cannot be formed and decided independently of other marketing means. Price decisions must be coordinated with product, distribution, and sales support decisions to harmonize and create an effective marketing program. A customer value based pricing strategy is increasingly recognised by academics and practitioners as the most effective approach to pricing for companies wishing to achieve increased profitability and sustained success (Hinterhuber, 2008: 41). According to Kotler and Keller (2007: 89–112), this pricing method is based on the perception of product value by customers and not by the company itself. It focuses on offering customers the right combination of product quality at a price they are willing to pay. It is based on the derivation of the price from the value attributed to the product by a customer who, in addition to his or her basic life needs, also satisfies his ethical, aesthetic and social needs through products of a certain kind, quality and price which reflect the psychographic aspects of the consumer, such as its values, lifestyle and more. (Kampf et al., 2017: 28). Mentioned aspects also include sympathization and identification with a famous person under whose name the product of the selected brand is sold. Ultimately, therefore, it can be assumed that this fact has an impact on the company’s pricing strategy, which is based on the value of the product as perceived by the customer.


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2. Methods The aim of the article is to define the theoretical basics of brand, branding and personal branding from the viewpoint of several foreign and Slovak authors, and analyze the use of personal branding in the specific conditions of the Slovak Republic. Based on the analysis and the results of the marketing survey, which focused on perception and influence of personal brands on Slovak consumers, measures for effective use of personal branding in the specific conditions of the Slovak Republic were proposed. The proposed measures are based on the fact that successful personal branding has an impact on the value of the product perceived by customers in terms of the psychographic aspects of pricing, as reflected in the customer value-based pricing strategy of the company. The basic sources of research were primary data from the marketing survey as well as secondary data obtained from published reports in the print and electronic media of professional publications. In their processing, mainly general scientific methods were used such as description, comparison, analysis, synthesis, deduction and induction. The aim of the marketing survey was to determine the perception and influence of the personal branding on Slovak consumers by using the questioning based on an electronic and personal questionnaire. The survey was conducted during February and March 2018 on a sample of 425 respondents from all over Slovakia. Selection of the respondent sample was random. For processing information obtained from the survey the quantitative assessment method was used and data were processed through empirical research in the form of percentages and the like.

3. Results Based on our analysis of the use of personal branding in the conditions of the Slovak Republic, we can summarize the following facts. Regardless of in the fact that the Slovak market is not yet very developed in terms of personal branding, some famous people are located even here and they are using the power of personal branding. The aArea of fashion and accessories is one of the most diverse areas of action, which is constantly changing and many famous people are trying to become involved in this area. One such personalities is the well-known Slovak singer and hip-hopper Patrik Vrbovsky performing under the pseudonym

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Rytmus. This famous artist, along with music, is also engaged in fashion. The first involvement was his collaboration with the shop network DUOS Eyewear which is the official distributor of the Cazal and Dita brands for Slovakia. He then created his own brand of hoodies, caps and various accessories under the name JBMNT, which was a great hit for a long time. Dara Rolins is a distinguished personality not only for the Slovak and Czech public, she has been well known since an early age; she also founded a brand that draws on her popularity. This singer also focused on fashion and accessories. Under her brand RukaHore (in English HandUp), ahe offers hoodies, t-shirts and various fashion accessories. Koloman Magyary, a musician who is known in Slovakia under the pseudonym Kali, has been on the music scene for many years. Over time, he also decided to take advantage of his glory and set up his own website www. dezertmusic.sk, on which he promotes, apart from his CDs, his own hoodies, t-shirts, hats and various other fashion accessories. The area of cosmetics and beauty is still slowly developing in terms of the Slovak market. Despite this, for a long time the most well-known Slovak make-up artist and hair stylist has been Lucia Sladeckova. In recent years, she has moved more and more into the public awareness. A great step towards becoming a celebrity was the collaboration with the commercial television channel TV JOJ in the famous program “Shopping Maniacs” and her transformation of the contestants. Subsequently she participated in the program “Czechoslovakia has talent”. She has long been collaborating with major international brands such as NYX, Cetaphil, Alo Diamonds and many others. She developed a brand called Lucid Style, which also includes a set of her own makeup brushes. In addition, she organizes makeup courses with various focuses that are very popular. In the area of blogging and vlogging, one of the most distinguished personalities is Daniel Sebastian Strauch so called Gogo. This Slovak young man has become famous especially in recent years through the YouTube network and he has not just stayed in blogs and videos. By the end of 2015, he had published his own book in which he told the story of how he got into blogging and vlogging. Based on the data comparison, we can assume that personal branding is only very little used in Slovak conditions. When we evaluate the number of famous Slovak people who use personal branding and many famous people who use personal branding abroad, we see a huge difference. While abroad, especially in the United Kingdom and the United States of America, these personalities take their chances almost instantly, but in the Slovak Republic only a few famous people use this option.


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We have seen one common character both for Slovak and famous foreign people who use personal branding. In recent years, all well-known people have been using social networks such as Facebook, YouTube, Twitter and Instagram to build their personal brands in particular. They also use for it for various events, or sales promotions to promote their personal brands. In our opinion, personal branding is a very promising area with great potential, which gives famous people the opportunity to make the most of their fame and public awareness, whether they are actors, singers, athletes, influencers, bloggers, politicians and so on. We also see areas where famous people do not permeate Slovakia at all or only to a small extent. For example, in the area of healthy eating, we see this as a great opportunity for the current trend for healthy diets. When famous people in Slovakia decide to penetrate the market with their own brand, they mostly choose fashion and cosmetics. These areas also come from foreign countries where stronger brands come under the names of world-renowned personalities, so the market becomes overwhelmed and personal brands of famous Slovak people sometimes lose out on this market. The analysis of the use of personal branding in specific conditions of the Slovak Republic was complemented by a marketing survey. As mentioned above, the aim of the marketing survey was to determine the perception and influence of personal branding on Slovak consumers. The total number of respondents was 425, of which 315 were women (74.12%) and 110 were men (25.88%). Marketing survey results were based on subjective responses of respondents: –– The survey found that most consumers do not pay special attention to products sold under the personal brands (45.88% of respondents). This points to the low rate of development and use of personal branding in Slovakia, as opposed to foreign countries where personal branding is very often used. –– This is evidenced by the responses of marketing survey respondents who have said they have their favourite personalities selling their products under their name, and in particular they mentioned the names of foreign artists and athletes (such as Beyonce, Kylie Jenner, David Beckham and so on). The most mentioned famous personality from the Slovak Republic was the cyclist Peter Sagan. –– In some cases, respondents marked as favourite some famous personalities who only appear in an ad; they are brand ambassadors, but the product is not branded under their personal brands. Nevertheless,

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it demonstrates popular celebrities with whom consumers sympathize or recognize can sell almost any product. The areas that most affect ordinary consumers and which are the most developed and used personal branding include fashion (20.3% of respondents) and sport (21.6% of respondents). With the widespread use of social networks and the internet, it is no surprise that Slovak consumers marked social networks such as Facebook, Instagram, Twitter or Youtube (42.31% of respondents), as well as on official sites of personal brands (11.4% of respondents) as the best form of information gathering and promotion of personal brands. Promotion through advertisement (in electronic or print media) was preferred by 22.1% of respondents. The marketing survey also investigated the satisfaction of Slovak consumers with these products and what products, branded under the name of a famous person, are most often bought. Based on the results, we deduced that Slovak consumers most often buy cosmetics (40.47% of respondents) or clothing (23.06% of respondents) under the personal brands of famous people. Respondents are absolutely (46.7% of respondents) or mostly satisfied (28% of respondents) with these products and sometimes they recommend them to their friends and acquaintances. Slovak consumers most often buy these products through official sites (45.9% of respondents) or in stores (27% of respondents). The results of the marketing survey also show that personal branding is slowly developing in Slovakia, and the well-known celebrities have many opportunities in this respect, towards which they can work and benefit from their public popularity. For the areas with the greatest potential and therefore the greatest interest of consumers we consider fashion – clothing, footwear, accessories and cosmetics, whether they be decorative cosmetics, hair, skin, body or perfumes. Slovak consumers are interested in such products, but quality in accordance with a reasonable price for the product is very important for them. Most respondents agreed that if a product under the personal brand of a famous personality meets the guaranteed quality criteria, they are willing to pay a higher price (65.2% of respondents). A minority of respondents said that they are willing to pay a higher price for the product without examining its quality (18.04% of respondents).


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4. Discussion Generally, it is very difficult for already existing and well-known brands to maintain market leadership and achieve product placement in the minds of consumers in such a way that they will remain interested. It is also not easy, due to various pressures from the environment of consumers and the public, to gain customer loyalty. In addition, brand names that are new try to penetrate the market and gain a certain position in the minds of consumers. Famous people have a certain advantage in this respect as they are public and consumers have a certain imagine of these persons. Although this image may be positive as well as negative, it still represents either a specific or even a general position (not included in any exclusive group, the consumer cannot decide) in the eyes and minds of the consumer, thus he has an awareness of the personality and its activities. Due to the current state of the market and the quantity of products on it, consumers are demanding in choosing the products they buy. The first factor that consumers are considering when they are interested in a product under personal brand is whether or not the personality is sympathetic, his lifestyle, how he is presented and what values he is promoting. All these elements are based on acting in the media, how the personality presents himself and his values through social networks, or what brands he collaborates with and promotes. Therefore, we recommend the use of social networks such as Facebook, Instagram, twitter and YouTube for self-promotion. A personality has to be very careful with what he shares and thinks about, in what light he wants to be perceived by the public and therefore also consumers. Social networks are very effective in promoting and communicating with his followers and potential customers as they are visited by millions of people a day. Another measure for effective personal branding in specific Slovak conditions is the recommendation to focus on fashion, accessories and cosmetics. These areas were most preferred by respondents in our marketing survey. However, whether it is fashion or cosmetics, Slovak consumers would like to ensure that the products have a high quality composition. Cosmetics must, of course, be dermatologically tested and today’s consumers base their choice of cosmetics on whether it has been tested on animals or not. Also, the level of corporate social responsibility of the brand may be often the important factor for a consumer’s loyalty. Many consumers are losing interest in brands which are reckless or environmental unfriendly. A significant factor influencing consumer decision-making is, of course, the price. Slovak consumers do not have a problem with paying for

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a high-quality product, and at the same time, supporting their favourite celebrity. However, it is important that personal branding does not exceed the price limit when the price becomes exaggerated. In these cases, the brand may lose consumers who prefer to buy similar products at a more affordable price. Based on this, we propose the need to perform a detailed market survey for personal brand and according to results of the survey, apply pricing strategies focused on the customer value-based pricing taking account psychographic aspects of the consumer linked with his identification and sympathization with his favourite personality. Personal branding is a form of competitive advantage as the consumer often perceives the well-known person’s development from the start; this personality creates a certain image in the mind of consumers. When this famous person comes to the market with his personal brand and products, there may be a big chance that there will be a group of consumers who will definitely buy this product. Whether the personal brand keeps the interest of its consumers depends on many factors. One of these factors is also the appropriate and successful presentation of the personal brand, especially through social networks and other media. Famous people can use these media to build their personal brands, then to inform customers about placing the product on the market, promoting their brand and their products among consumers who track their accounts. The advantage of social networks is their low cost, ease of use and that they are being used by many people with the numbers growing daily.

Conclusions Nowadays, in the market full of different products, which are offered to the customers of each side, brands face stiff competition and often must cope with different problems to be able to attract and retain customers. For this reason, not only in Slovak conditions but all over the world, there is a space and great potential for personal branding and the gradual build up of the personal brand in the mind of consumers. The main advantages of personal branding include: –– raising awareness of the well-known personality; –– enhancement of his image; –– achieving customer loyalty; –– competitive advantage; –– effectiveness of product sales.


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Acknowledgements This paper is an outcome of the science project VEGA 1/0718/18: The impact of psychographic aspects of pricing on the marketing strategy of companies across products and markets.

References Aaker, J., Fournier, S. and Brasel S. A. (2004), When good brands do bad, Journal of Consumer Research, 31(2): 1–16. Alshehhi, Y.Z., Olah, J. (2017), Sectorial analysis: growth accounting of secondary industries, Network Intelligence Studies, 5(9): 39–45. Bieliński, T. (2016), Innovativeness and human capital as a main source of competitiveness of Chinese economy, Forum Scientiae Oeconomia, 4(1): 21–31. Campbell, J., Ross, S., Thomson, E. (2017), Recession and recovery in Scotland: the impact on women’s labor market participation beyond the headline statistics, Journal of Research in Gender Studies, 7(1):123–136. Chaudhuri, A., Holbrook, M.B. (2001), The chain of effects from brand trust and brand affect to brand performance: the role of brand loyalty, Journal of Marketing, 65(2): 81–93. Dorčák, P. (2013), eMarketing – Ako osloviť zákazníka na internete, Revell Books. Goffman, E. (1999), The presentation of self in everyday life, Doubleday: Anchor Books. Harris, E.C., Mychel L.E. (2017), The role of gender and motherhood ideologies in perpetuating workplace inequality, Journal of Research in Gender Studies, 7(2): 67–85. Healey M. (2008), What is branding? Rockport Publishers. Hinterhuber, A. (2008), Customer value based pricing strategies: why companies resist, Journal of Business Strategy, 29(4): 41–50. Jones R. (2017), Branding: a very short introduction, Oxford: Oxford University Press. Kampf, R., Lizbetinova, L., Tislerova, K. (2017), Management of customer service in terms of logistics information systems, Open Engineering, 7(1): 26–30. Kliestik, T., Misankova, M., Valaskova, K., Svabova, L. (2018), Bankruptcy prevention: new effort to reflect on legal and social changes, Science and Engineering Ethics, 24(2): 791–803. Kotler, P., Keller, K.L. (2007), Marketing management, Prague: Grada Publishing. Krizanova, A. Masarova, G., Stefanikova, L, Rypakova, M. (2015), Building a brand in the context of sustainable development, ICEMI 2015 International Conference on Management Engineering and Innovation: Changsha, China, January 10–11, 79–84.

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Lake, L. (2018), Personal branding and what you need to know about it, available at: https://www.thebalance.com/what-is-personal-branding-4056073, (accessed 10 March 2018). Merz, M., He, Y., Vargo, S. L. (2009), The evolving brand logic: a service – dominant logic perspective, Journal of the Academy Marketing Science, 37(3): 328–344. Nica, E., Taylor, L. (2017), New media technologies, digital sharing, and the neoliberal economy, Ekonomicko-manazerske spektrum, 11(2): 103–110. Okonkwo, U. (2007), Luxury fashion Branding: trends, tactics, techniques, Berlin: Springer erlag. Pashkus V., Pashkus N., Pashkus M. (2016), Strong cultural brand formation in the global economy on the basis of Russian art market (the example of St. Peterburg), Ekonomicko-manazerske spektrum, 10(2): 49–61. Tamulienė, V., Pilipavičius, V. (2017), Research in customer preferences selecting insurance services: a case study of Lithuania, Forum Scientiae Oeconomia, 5(4): 49–58 Taylor, D. (2007), Brand management, Brno: Computer Press. Van Den Bergh, J., Behrer M. (2012), How cool brands stay hot, BIZBOOKS.

Margareta Nadanyiova, PhD, is a university teacher at the Department of Economics, Faculty of Operation and Economics of Transport and Communications, University of Zilina in the Slovak Republic. Her PhD is in Economics and Business Management, and her thesis was dedicated to new forms of marketing communication. She has 15 years of experience in teaching marketing, services marketing, organization of managerial work and economic statistics. She specializes in marketing, marketing communication, corporate social responsibility and business economics. She has taken part in scientific research in the field of brand value, corporate social responsibility, psychographic aspects of pricing and personnel marketing. She has publications in these fields of research, some of which have been published in scientific databases like SCOPUS and Web of Science. Lubica Gajanova, PhD, is a university teacher at the Department of Economics, Faculty of Operation and Economics of Transport and Communications, University of Zilina in the Slovak Republic. Her PhD is in Economics and Business Management, and her thesis was dedicated to competitive intelligence. She has eight years of experience in administrative work and five years of experience in teaching marketing and accounting (lectures and seminars). She has taken part in scientific research in the field of brand value, corporate social responsibility and psychographic aspects of pricing. She has publications in these fields of research and in the field of competitive intelligence as well. Some of these have been published in scientific databases such as SCOPUS and Web of Science.


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Dominika Moravcikova is a PhD student at the Department of Economics, Faculty of Operation and Economics of Transport and Communications, University of Zilina, in the Slovak Republic. She graduated from the Faculty of Operations and Economics of Transport and Communications of the University of Zilina in the field of corporate study economics and management in 2016. In the same field, she is continuing her doctoral study with a dissertation topic dedicated to new forms of marketing communication. She specializes in marketing, marketing communication, and business economics, and publishes contributions in domestic and international scientific conferences whose outputs are included in internationally recognized databases such as SCOPUS and Web of Science. She is co-founder of projects in the field of corporate social responsibility, psychographic aspects of pricing and brand value.

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179

Kristína Predanocyová

email: [email protected] Slovak University of Agriculture in Nitra, Faculty of Economics and Management, Nitra, Slovak Republic

Consumer behavior on the Slovak market for meat and meat products Abstract. Meat is important in human nutrition and its substitutability is limited by other food products. However, consumers should consume meat to an appropriate extent, because its excessive consumption can negatively affect human health. This paper is oriented to meat consumption in Slovakia. The aim of the paper was to identify consumer behavior towards meat and meat products including factors affecting consumer decision making. The primary data were the results of a questionnaire survey, which showed that 97.8% of consumers consume meat and meat products, but poultry meat is the most preferred. Consumers buy these products mainly at supermarkets, hypermarkets, and local stores and make decisions according to ingredients, quality, price, durability and country of origin. Results showed that most consumers will increase or not change the consumption of meat and meat products in the future. Based on the above it is necessary to deal with the issue of meat and meat products with an emphasis on beef and fish. Key words: meat and meat products; consumer; consumption; consumer behavior; decision making

Introduction Meat and mainly meat products are a part of the daily diet of most people. The importance of meat and meat products in human nutrition is significant because these products represent an important source of high-quality dietary protein. In addition, red meat, in particular, significantly contributes to the intake of a wide range of micronutrients, including iron, zinc, selenium, vitamin D and vitamin B12. These nutrients can be supplied in sufficient amounts by consumption of other food products, for example by fruit and vegetables; however, the substitutability of meat intake is limited. Consumption

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of meat and meat products protects against malnutrition and improves cognitive development. On the other hand, excessive consumption of meat and meat products is often associated with obesity and an increased risk of chronic diseases (Salter, 2018). Based on this, the meat industry has potential and the consumption of meat and meat products in a reasonable quantity is desirable. The aim of the paper is to point out the current consumption of individual types of meat in the Slovak Republic and to identify the main factors determining the purchase and consumption of meat and meat products.

1. Literature review The Slovak Republic was one of the countries with a high annual consumption of meat per capita in the 1970s and 1980s. However, after 1990, there was a significant decrease in the consumption of meat and meat products and the composition of individual types of meat has started to change (Nagyová and Dobák, 2002; Šimo, 2000). Demand for meat and meat products has become a limiting factor in the development of the meat industry in Slovakia. In addition, consumers’ requirements are steadily evolving and changing primarily with regard to nutritional trends. Based on the above, it is necessary to identify the factors affecting consumers in the process of buying and consuming meat and meat products and also to respond to their needs (Nagyová and Kapsdorferová, 2006). In the Slovak Republic during the period 2003–2017 the development of consumption of meat per capita was fluctuating (Statistical Office of the Slovak Republic [SO SR], 2018). In 2005, the consumption of meat and meat products began to decline slightly and in 2010, the consumption was lower in comparison with the recommended intake (57.3 kg per capita). Because of the fact that this trend lasted into 2016, it is necessary to deal with the possible reasons for the relatively low consumption of meat and meat products. Decrease in consumption of meat and meat products could be caused by food scandals, the living conditions of the Slovak population or unconfirmed information about the negative impacts of meat consumption on human health (Sedlák, 2015). Nowadays, the consumption of meat is at the level of 62.1 kg per capita and year, so the consumption is higher by 8.4% in comparison with the recommended consumption. Meanwhile, pork meat (57.2%), poultry meat (32.9%) and beef (7.9%) contributed to the total consumption of meat. The consumption of mutton, goat and horse meat is very low (Nagyová et al., 2012).

K. Predanocyová: Consumer behavior on the Slovak market for meat and meat products

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Figure. 1. Consumption of meat in the Slovak Republic in kilograms per capita and year 70 61,5 60,1 61,6

61,1

60

59

58,2 58,7

58,4

56,3 55,8

52,5 53,3

50

40

47,9

62,1

50,6

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Recommended con��mp�on of meat per capita Real con��mp�on of meat per capita

Source: SO SR, 2018.

In the context of the consumption of meat and meat products, it is also necessary to focus on the species composition of meat consumption. From a nutritional point of view, it is advisable to alternate individual types of meat, but according to SO SR (2018) pork meat is the most favored and consumed meat. Selling of pork meat is currently supported by a variety of marketing activities in retail, so this kind of meat has become an easily available product for Slovak households. This is confirmed by the current consumption of 35.5 kg per capita. The second most preferred meat is poultry with a consumption of 20.4 kg per capita annually. Current consumption is influenced by favorable prices, the purchasing power of the population, new nutritional trends and lifestyles. A significant impact on the consumption of poultry is caused by the fact that this type of meat is a substitute product, especially for beef meat and pork meat, which are characterized by higher prices in comparison with poultry meat. The development of poultry meat consumption will be influenced by the supply of poultry meat and meat products and the price relation between the different types of meat (Matošková, et al., 2016; Nagyová and Drnzíková, 2008). The consumption of beef per capita annually is very low and in the last 10 years, the consumption was below 5 kg per capita annually. Since 2013, there has been a gradual increase in annual consumption, which may have been caused by real wage growth, the living standard of the population, changing eating habits and awareness of the positive effects on consumer health (Matošková and Gálik, 2016). The development of fish consumption in the Slovak Republic is increasing but only slightly. The consumption of fish meat is 5.4 kg per capita annually. If consumers become aware of the health effects of fish consumption, it will be very likely that their consumption will gradually increase.

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Figure 2. The consumption of meat and meat products in kilograms per capita and year 37,5 35 32,5 30 27,5 25 22,5 20 17,5 15 12,5 10 7,5 5 2,5 0

32,3 31,9 32,9 32,2

20,7

20,4

22,3

21,1

32,2 32,3

19,9

19,3

32

30,8 31,6

20,7

19

19,9

6,8

6,2

6,2

5,3

5,3

4,9

4,3

4,3

3,7

4,2

4,4

4,4

5,1

4,7

4,9

4,6

5,1

4,7

30

30,9

17,7

16,9

28

30,9

35,4

35,5

20,4 14,5

14,1

16,9

3,6

4,4

4,2

4,3

4,7

4,9

4,8

5,1

5,4

5,3

5,1

5,4

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Pork meat

Poultry meat

Beef meat

Fish meat

Source: SO SR, 2018.

The sufficiency of current consumption of individual types of meat can be assessed according to the level of recommended intake. Excessive consumption (consumption higher than the recommended consumption) is observed in the case of pork and poultry meat and meat products. Consumption of pork meat is higher by 59.9% compared to the recommended consumption (22.2 kg), and poultry meat consumption is higher by 31.6% compared to the recommended consumption (15.0 kg). This is due to the relatively low prices of the mentioned products. Excessive consumption can cause health problems for consumers. On the other hand, insufficient consumption (consumption lower than the recommended consumption), is recorded in the case of beef and fish meat. Consumption of fish meat and meat products are lower by 10% compared to the recommended consumption (6.0 kg) and the consumption of beef is lower by 71.8% compared to the recommended consumption (17.4 kg). This is due to higher prices and not enough consumer knowledge about the positive effects of their consumption on human health. In the future, significant changes in the consumption of meat will not be expected, so it is necessary to emphasize the diversity of diet, the rotation of individual types of meat and the health effects of their insufficient and also excessive consumption.


183

Figure 3. Comparison of recommended and current consumption of meat in 2017 Fish meat Beef meat Pork meat Poultry meat

-10,00% -71,84%

-100,00%

59,91% 31,61% -75,00%

-50,00%

-25,00%

insufficient consum��on

0,00%

25,00%

50,00%

75,00

100,00%

excessive consum��on


In the context of the above-mentioned information, it is important to point out consumer behavior towards meat and meat products. Consumer behavior can be defined as the behavior that occurs in the search, purchase, use and disposal of products and services which meet the needs of consumers (Horská et al., 2009). The choice of food is influenced by several factors that the consumer considers as important in the process of purchasing, such as the perception of food safety (Adam et al., 2014), quality perception (Stávková et al., 2008), health aspects (Wingert et al., 2014), food prices (Kubicová and Kádeková, 2011) and food origin (Kleinová and Lušňáková, 2011). Experts define various factors affecting the purchase and consumption of meat and meat products. Price, income, quality, taste, safety, health and environmental factors are considered as factors influencing consumer behavior towards meat and meat products (McCarthy et al., 2004; Dransfield et al., 2005; Popescu, 2013). However, price, quality issues and socio-demographic factors are the most important for consumers in the decision-making process. The first factor affecting the consumption of meat and meat products is their consumer prices, which depend mainly on production. The production process for meat is relatively long (especially beef carcasses) and requires a thoughtful response to changes in producer and market requirements. Knowing the price of not only producers and processors, but most consumer prices is important information for market participants with meat and meat products (Kleinová and Kretter, 2011). Market forces and developments in the prices of meat and meat products was reflected in consumer preferences. Font et al. (2014) emphasize that price has a very significant importance in the process of consumers’ purchasing decisions. In the context of this, consumers are relatively sensitive to changes in the prices of individual types of meat (Kubicová and Kádeková, 2012). Due to the fact that prices for beef meat have had an increasing tendency over the last 15 years, consumption of pork and poultry as substitute products have also been rising (SO SR, 2018). Trends in meat consumption suggest that the influence of factors such as income and price will decline over time and other factors, for example quality, will become more

184


significant in influencing consumer choice (Henchion et al., 2014). The quality of meat and meat products is perceived differently from every consumer’s point of view. Consumers evaluate the quality of the meat subjectively, but most consumers consider high-quality meat and meat products as pleasant, healthy and safe products and also as products produced in organic farming which protect the environment and animal welfare (Trienekens et al., 2012; Grunert, 2006; Lucke, 1998). Luning et al. (2002) suggest that the consumer considers meat and meat products to be high quality if these products are able to fully meet people’s needs in terms of physiological and psychological needs. The perception of the quality of meat and meat products is determined by sensory aspects such as appearance, taste, aroma and coloring (Stávková et al., 2007). In terms of quality, consumers also notice the composition of meat products with an emphasis on the proportion of meat. Nowadays, the purchase and consumption of meat and meat products are also influenced by various independent variables such as household income, household size and household composition, age, place of birth, education and economic status of consumers (Antwi-Boateng et al., 2017). This idea is confirmed by Liu and Deblitz (2007) who point out that the consumption of meat and meat products in households is also affected by economic, social as well as demographic variables such as urbanization, education and change of lifestyle and health problems. In the future, it will be assumed that consumer behavior will be influenced by continuous development of the market with meat and meat products, such as the production of meat from laboratories, hybrid meat products or insects (Alexander et al., 2017) and also by various existing plant-based meat substitutes, for example soya, tempeh, seitan, tofu, quorn, shmaky and robi (Hoek et al., 2011). According to Elzerman et al. (2011) the acceptance of meat substitutes is very low by consumers, so it is necessary to deal with the consumption of individual types of meat and meat products and follow the changes in consumer behavior.

2. Materials and methods The aim of this paper is to focus on consumer behavior on the market for meat and meat products with an emphasis on the factors affecting consumer decision making in the process of the purchase of meat and meat products. In connection with its fulfilment, certain methods for collecting and obtaining information and methods for information processing were used.


185

Within the scope of data collecting methods, we used secondary and primary data. Secondary data represent information from domestic and foreign literature and web pages focused on processed issues, as well as from the Statistical Office of the Slovak Republic. Primary data were obtained from the results of a questionnaire survey. The aim of the survey was to identify factors affecting consumer decision making in the process of the purchase of meat and meat products. The survey was realized from April 2018 to June 2018 on a sample of 446 respondents, who were divided into 7 categories by gender: men (37.7%), women (62.3%); age: less than 25 years (42.8%), 26-35 years (23.1%), 36-50 years (19.3%), 51-60 years (9.0%), more than 61 years (5.8%); education: elementary (1.8%), secondary (47.5%), university (50.7%); residence: village (48,0%), city (52,0%); economic status: student (36.6%), employed (48.4%), self-employed (4.7%), unemployed (1.1%), maternity leave (2.5%), retired (6.7%); monthly income: less than 400 Eur (39.9%), 401 – 800 Eur (38.8%), 801 – 1200 Eur (15.0%), 1201 – 1600 Eur (4.0%), more than 1601 Eur (2.2%); and number of members in household: 1 member (4.0%), 2 members (22.0%), 3 members (21.1%), 4 members (34.0%), 5 members (12.5%), more than 5 members (6.3%). For a deeper analysis of the research objectives, the following hypotheses were formulated: Hypothesis 1: We assume that there is a dependence between the consumption of meat and meat products and the gender of consumers. Hypothesis 2: We assume that there is a dependence between the place of purchase of meat and meat products and the residence of consumers. Hypothesis 3: We assume that price is one of the most important factors in the selection of meat and meat products for more than 80% of consumers. Hypothesis 4: We assume that there is a dependence between future purchase and consumption of meat and meat products and age of consumers. The formulated hypotheses were tested by applying the following statistical tests: Chi-Square Test of Independence, Cramer’s V coefficient, Test of hypothesis for a proportion. In hypothesis testing, if the p-value is lower than the significance level (0.05), the null hypothesis is rejected and the alternative hypothesis is confirmed.

186


3. Results and discussion The aim of the questionnaire survey was to identify the consumer and buying behavior towards meat and meat products. Based on the research results, it could be stated that 97.8% of respondents consume meat and meat products, and 2.2% of surveyed consumers do not consume any meat and meat products. For the following purposes, only consumers consuming at least one type of meat and meat products were evaluated. The results of consumer research showed that 67.0% of respondents consume all types of meat, 1.6% of them consume only poultry meat, 0.5% consume only fish meat, 0.2% consume only beef meat, and 30.7% of the respondents combine 2 or 3 types of meat and meat product in their consumption. Poultry meat is consumed by 98.4% of consumers, pork meat is consumed by 90.4% of consumers, beef meat is consumed by 80.1%, with up to 48.2% of respondents eating it irregularly, fish meat is consumed by 86.0% of consumers, with up to 55.0% consuming it irregularly. Based on these results, it could be stated that poultry meat is the most preferred meat, which is also confirmed by the results of Antwi-Boateng et al. (2017) and Pourová et al. (2004). Regarding this question dependence was examined between the consumption of individual types of meat and respondents’ genders. Applying the statistical test, the Chi-squared test of independence with a significance level α = 0.05, no statistically significant dependency has been proved between gender and the consumption of poultry meat (p-value = 0.6017), pork meat (p-value = 0.7405) and fish meat (p-value = 0.8414). Only one dependency was confirmed in the case of beef meat (p-value = 0.0004). Based on the Cramer’s V-coefficient (0.17) it could be concluded that the strength of dependency is weak. Table 1. Influence of respondents’ genders on consumption of individual types of meat Factors

p-value

correlation

Cramer’s V-coefficient

Gender and consumption of poultry meat

0.6017

no

-

Gender and consumption of pork meat

0.7405

no

-

Gender and consumption of beef meat

0.0004

yes

0.17

Gender and consumption of fish meat

0.8414

no

-

Source: own calculation.


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Figure. 4. Consumption of meat and meat products according to gender of consumer consuming at least one type of meat or meat product Pork meat

Poutry meat 78,9 77,4 % %

62,0 60,4 % %

Beef meat 43,4 % 24,8 %

38,0 39,6 % %

21,1 22,6 % %

Fish meat

75,2

56,6 % %

36,1 %

68,9 %

63,9 % 31,1 %

regular irregular or no regular irregular or no regular irregular or no regular irregular or no con�um��on con�um��on con�um��on con�um��on con�um��on con�um��on con�um��on con�um��on men

men

women

women

men

women

men

women


The aim of the questionnaire survey was also to identify the frequency of the purchase and subsequent consumption of meat and meat products. Poultry meat and meat products are the most commonly purchased meat product at regular intervals, because this type of meat is daily purchased by 11.2% of respondents, 29.8% of consumers buy it two or three times a week, and 35.3% of consumers buy it once a week. Pork meat is the most purchased by consumers daily (3.9%), once a week (17.7%) and two or three times a week (37.2%). Overall, 29.4% of respondents purchase and eat this type of meat irregularly. This is also confirmed by the results of the research by Schmid et al. (2017) who found that more than 50% of consumers buy poultry and pork meat at least once a week. Beef is the most purchased by consumers at non-regular time intervals (48.2%). Moreover, 21.6% of respondents never buy this type of meat, which may be due to the excessively high prices in proportion to the income of the population of the Slovak Republic. Irregularity in the purchase and consumption is also recorded in the case of fish meat. Only 32.1% of consumers buy it regularly. Figure 5. The frequency of purchase of meat and meat products 60,0%

55,0%

48,2% 40,0% 20,0% 0,0%

35,3% 29,8% 11,0%

37,2% 29,4%

20,4%

17,7% 3,9%

3,4% Poultry meat daily

11,9%

1,6% Pork meat

2�3 �mes a week


18,1% 21,6% 10,3%

once a week

19,5% 11,0% 1,6%

Beef meat irregularly

14,0%

Fish meat do not purchase

188


The questionnaire survey was also focused on the place of purchase where consumers most often buy selected types of meat. Poultry meat and meat products are purchased by consumers in supermarkets and hypermarkets (64.7%), local specialized stores (19.5%) or products are purchased directly from the farmer (6.4%). Supermarkets or hypermarkets (52.3%), local specialized stores (21.1%) and stores of producers (8.5%) are the most frequent for the purchase of pork and meat products. Beef is most often bought by consumers in supermarkets and hypermarkets (44.0%), local specialized stores (16.5%) and directly from producers (10.1%). Fish is mostly bought in supermarkets and hypermarkets (67.7%), in local stores (10.8%) and directly from producers (3.9%). Kubíčková and Šehrantová (2005) found that consumers most often buy meat and meat products in butchers, supermarkets and hypermarkets. In the context of this, it is important to emphasize that Slovak consumers have started farming and producing their own poultry meat and meat products (1.8%), pork meat and meat products (3.9%), beef meat and meat products (1.8%) and fish (1.1%). It follows that livestock farming and the subsequent production of meat products in the domestic environment has become more and more popular among consumers and could be considered as a trend on the meat and meat products market. Regarding this question, the dependence was examined between the place of purchase of meat and meat products and each respondent´s place of residence. Applying the statistical test, the Chi-squared test of independence with a significance level α = 0.05, no statistically significant dependency has been proved between the place of residence and place of purchase of poultry meat (p-value = 0.1604), and fish meat (p-value = 0.7712). The dependencies were confirmed in the case of pork meat (p-value = 0.0082) and beef meat (p-value = 0.0266). Based on the Cramer’s V-coefficient (0.19 for pork meat and 0.17 for beef meat) it could be concluded that the strength of dependencies is weak. Table 2. Influence of respondent’s place of residence on the place of purchase for meat and meat products Factors

p-value

correlation


Residence and place of purchase for poultry meat

0.1604

no

-

Residence and place of purchase for pork meat

0.0082

yes

0.19

Residence and place of purchase for beef meat

0.0266

yes

0.17

Residence and place of purchase for fish meat

0.7712

no

-

Source: own calculations.


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Figure 6. Place of purchase for meat and meat products according to the residence of respondents 69,2% 59,8%

Poultry meat

Pork meat

60,4% 43,5%

22,5% 16,7%

24,4% 18,1% 6,6% 4,8% 5,3%

7,7%

0,9%

2,9%

1,3%

2,4%

super- specialized stores of purchasing producing do not market, stores producer from own meat purchase hyperproducers products market

city

8,1%

9,6% 4,8%

2,6%

5,3%

5,3%

9,1%


village

city 69,2% 66,0%

Beef meat

49,8%

8,8%

village

Fish meat

36,8% 16,7% 16,3%

12,0% 9,1% 8,4% 6,2%

22,5% 18,5% 0,4%

3,3%


city

village

11,0% 10,5%

3,5% 3,8% 3,5% 4,3%

0,4%

1,9%

13,4% 12,3%


city

village


The questionnaire survey was also focused on the factors that influence Slovak consumers in the process of buying meat and meat products. Based on the results, it can be said that the quality (99.8%), ingredients (95.9%) and the price (93.9%) are considered to be the most important factors for the selection of meat products for consumers. On the other hand, the product promotion (75.7%), the appearance of the product packaging (63.1%) and the size of the packaging (26.2%) are not considered as important criteria by consumers. The survey by GfK (2017) has shown that the price is still a very important criterion for Slovak customers; however, the quality factor is increasing in importance. Overall, 59% of consumers claimed they compare prices in different stores and choose the store with the lowest prices. As the results show, consumers are focused on quality, and they are looking for relatively high quality food at the best price.

190


Figure 7. The importance of factors affecting the selection of meat and meat products product pro�oc�on

49,8%

16,1%

8,3%

38,8%

producer

11,2%

25,7%

18,1%

42,9%

17,2% 0,2% 0,0% 25,0%

70,9% 10,0%

20,0%

30,0%

certainly yes

40,0%

yes

3,0%

18,4%

82,6%

ingredietns

3,9%

22,3% 39,7%

39,0%

quality

0,0%

5,5% 0,7% 6,4% 0,9%

45,0%

31,0%

nutri�on

3,7%

30,1% 29,6%

63,0%

durability

2,3%

15,4% 19,7%

37,8% 63,8%

price

size of the packaging

35,6%

46,8%

origin

packaging appearance

25,9%

50,0%

no

60,0%

70,0%

80,0%

3,4% 0,7% 90,0%

100,0%

certainly no


Because of the fact that the price is a discussed criterion in the selection of meat and meat products, it was assumed that price is an important factor for more than 80% of consumers. Applying the statistical test of hypothesis for a proportion, the null hypothesis was rejected because the p-value (0.9381) is not in the confidence interval . It could be concluded that price is one of the most important factors in the selection of meat and meat for more than 80% of respondents. The quality of meat products as a very important factor in their selection is often connected to the composition of the product. The main ingredient of meat products is the meat and the share of meat should be as large as possible. In the context of the above, the consumer survey also focused on whether consumers decide according to the share of meat in the selection of meat products. Based on the results, it could be stated that the majority of consumers look at the share of meat in poultry products (84.4%) and pork products (81.0%). On the other hand, a few consumers look for information about the share of meat in the process of buying beef products (25.0%) and fish meat (35.4%), which could be caused by two factors. Firstly, consumers do not buy these products because of their high prices and the second factor is that consumers who buy these products choose from the cheapest ones. These products are likely to have a low share of meat, so consumers do not look for this information on the product packaging. Considering that meat and meat products are a source of protein, minerals, iron, zinc and B vitamins, their consumption has health benefits, and their substitutability is limited amongst other food products. Therefore,


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the questionnaire was focused on consumer behavior in the future. The questionnaire was to find out whether consumers are planning to change the quantity of purchased and consumed meat and meat products. Based on the results, it could be stated that the majority of Slovak consumers will not change the quantities of consumed meat and meat products. In the case of poultry meat and meat products, 6.7% of respondents will plan to increase their consumption and 19.5% will expect to consume less poultry in the future compared to the current consumption. In total, 10.1% of respondents will increase their consumption of pork meat and 16.5% of consumers will decrease pork consumption in the future. Beef and meat products will be more consumed by 10.8% of respondents, but 27.1% of consumers will plan to reduce their consumption over the next few years. A similar trend of development is also observed in fish consumption. Fish consumption will be planned to increase by only 8.5% of consumers and 38.3% of respondents will plan to eliminate it. The results of the survey are also confirmed by Kearney (2010), who predicts that consumption of meat and meat products will slightly increase by 2050, due to increased consumption of pork and poultry meat and meat products. Regarding this question, the dependence was examined between the future purchase and consumption of meat and meat products and respondent´s age. Applying the statistical test, the Chi-squared test of independence with a significance level α = 0.05, no statistically significant dependency has been proved between the age and the future consumption of pork meat (p-value = 0.1104). The dependencies were confirmed in case of poultry meat (p-value = 0.0021), beef meat (p-value = 0.005) and fish meat (p-value = 0.0021). Based on the Cramer’s V-coefficient (0.20 in poultry meat, 0.18 in beef meat and 0.20 in fish meat) it could be concluded that the strength of dependencies is weak. Table 3. Influence of respondent’s age on the future purchase of meat and meat products Factors

p-value

correlation


Age and future purchase of poultry meat

0.0021

yes

0.20

Age and future purchase of pork meat

0.1104

no

0.18

Age and future purchase of beef meat

0.0050

yes

-

Age and future purchase of fish meat

0.0021

yes

0.20


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Figure 8. Future purchase of meat and meat products according to age of respondents Poultry meat 58,4%

77,8% 68,6%

63,6%

Pork meat

74,2%

49,2%

44,3%

31,4% 27,3% 6,5%

will not change less than 25 years

10,3%

will decrease 26–50 years

will increase more than 51 years

will not change

will decrease

less than 25 years

26–50 years

Beef meat 68,1%

63,6% 58,4%

54,6%

13,0% 9,2% 9,1%

will decrease 26–50 years

18,9%

49,2%

44,3%

36,2%

less than 25 years


Fish meat

66,7%

will not change

20,5% 19,7% 11,4%

10,8% 10,8% 6,1%

9,1%

31,4% 27,3%

24,2% 6,5%


will not change

10,3%

9,1%

will decrease

less than 25 years

26–35 years

will increase 36–50 years


Based on the research results, it is important to emphasize that nowadays there is a low consumption of beef and fish meat, and according to consumer research, the consumption of beef and fish will not have a rapid growth trend in the following years. This situation could be caused by the higher price of beef and fish meat (Schmid et al., 2017), mistrust in the quality of the produced meat and meat products and the existence of various vegetable substitutes for meat and meat products (Kumar et al., 2017).

Conclusions The aim of this paper was to identify the consumer behavior towards meat and meat products, with an emphasis on the factors affecting the consumption of meat. Based on the analysed secondary data and own calculations, it could be concluded that nowadays, the average annual consumption of meat per capita of the Slovak Republic is sufficient compared to the recommended consumption; however, the distribution of consumption of individual types of meat is not adequate. Consumption of pork meat is higher by 62% compared to the recommended consumption and the consumption of poultry


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meat is higher by 32%. On the other hand, the consumption of fish meat is lower by 10% compared to the recommended consumption and the consumption of beef is lower by 72%. The realized questionnaire survey showed that 97% of consumers consume at least one type of meat and meat products. Poultry and pork are considered the most preferred types of meat among consumers. Poultry meat, pork meat and fish meat are consumed equally by men and women. However, beef meat is consumed more by men compared to women. The results also showed that consumers buy meat and meat products mainly at supermarkets, hypermarkets, specialized stores, stores of producers, or directly from the producers. Differences between place of purchase and place of consumers’ residence were found in the case of pork meat and beef meat. In addition, some consumers, mainly from villages, have started to produce their own poultry and beef meat products. Research also showed that the quality, ingredients and price are the most important factors affecting purchase and subsequent consumption of meat and meat products. The results of the questionnaire survey confirmed the low consumption of beef and fish meat and the majority of consumers will not plan to change it in the following years due to the existence of substitution products and relatively high prices of beef and fish. Mainly consumers younger than 25 years old will plan to increase their consumption of beef meat and fish meat in the future. Substitutability of meat in human nutrition is limited. Despite this fact, consumption and consumer behavior could be influenced by various meat substitutes in the future. Based on the above, it is necessary to deal with the meat industry with an emphasis on eliminating the consumption of poultry and, in particular, pork meat, and increasing the consumption of beef and fish. In the future, we will monitor changes in the consumption of individual types of meat and examine consumer behavior towards meat and meat products on the Slovak market. We assume that the consumption of individual types of meat will be able to change if Slovak consumers are informed and they raise their awareness of the health effects of consumption.

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Lucke, F.K., (1998), Meat and meat products from ecological production – Consumer requirements and reality, Fleischwirtschaft, 78(5): 446–449. Luning, P., Marcelis, W.J., Jongen, W.M.F. (2002), Food quality management: A technico-managerial approach, Wageningen: Wageningen Pers. Matošková, D. Gálik, J. (2016), Trh s hovädzím a bravčovým mäsom a jeho prognóza do roku 2020, Ekonomika poľnohospodárstva, 16(1): 88–105. Matošková, D., Jamborová, M., Gálik, J. (2016), Trh s hydinovým mäsom a jeho prognóza do roku 2020, Ekonomika poľnohospodárstva, 16(4): 61–79. McCarthy, M., O’Reilly, S., Cotter, L., de Boer, M. (2004), Factors influencing consumption of pork and poultry in the Irish market, Appetite, 43(1): 19–28. Nagyová, Ľ., Drnzíková, Z. (2008), Výrobné a marketingové prístupy k vertikále hydiny a hydinových výrobkov, Nitra: SPU v Nitre. Nagyová, Ľ., Dobák, D. (2002), Konkurencieschopnosť hovädzieho mäsa a jeho produktov v SR pred vstupom do EÚ. In: Zborník vedeckých príspevkov z riešenia vecných problémov hlavných úloh inštitucionálneho výskumu v rokoch 2000-2002 (pp.187–192), Nitra: Agrotar. Nagyová, Ľ., Kapsdorferová, Z. (2006), Quality and safety on meat and meat products market. In: F. Talinga (ed.) K otázkam poľnohospodárskej politiky EÚ: To the issues of EU agricultural politicy: Zborník príspevkov z medzinárodnej vedeckej konferencie (pp.77–82), Nitra: SPU v Nitre. Nagyová, Ľ., Hambálková, M., Rovný, P., Dobák, D., Récky, R., Kubicová, Ľ., Gálová, J. (2012), Súčasné tendencie vo výrobe a odbyte vybraných poľnohospodárskych a potravinárskych výrobkov v SR, Nitra: SPU v Nitre. Popescu, A. (2013), Research on consumer behaviour on Bucharest meat market, Engineering in Agriculture and Rural Development, 13(1): 301–308. Pourová, M., Čermáková, J. (2004), Faktory ovlivňující nákupní chování spotřebitelů masa v České republice, Maso, 1(3): 3–5. Salter, A.M. (2018), The effects of meat consumption on global health, Revue Scientifique et Technique-Office International des Epizooties, 37(1): 47–55. Schmid, A., Gille, D., Piccinali, P., Bütikofer, U., Chollet, M., Altintzoglou, T., Honkanen, P, Walther, B., Stoffers, H. (2017), Factors predicting meat and meat products consumption among middle-aged and elderly people: evidence from a consumer survey in Switzerland, Food & Nutrition Research, 61(1): 1–11. Sedlák, J. (2015), Jeme alarmujúco málo mäsa, Pravda, available at: https://www. spravy.pravda.sk/ekonomika/clanok/375773-jeme-alarmujuco-malo-masa, (accessed 17 September 2018). Šimo, D. (2000), Agrárny marketing, Nitra: SPU v Nitre. Statistical Office of the Slovak Republic(n.d.), Consumption of selected kinds of foodstuffs per capita, available at: http://datacube.statistics.sk., (accessed 17 September 2018). Stávková, J., Prudilová, H., Toufarová, Z., Nagyová, Ľ. (2007), Factors influencing consumer behaviour when buying food, Agricultural Economics, 53(6): 276–284. Stávková, J., Stejskal, L., Toufarová, Z. (2008), Factors influencing consumer behaviour, Agricultural Economics, 54(6): 276–284.

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Trienekens, J.H., Wognum, P.M., Beulens, A.J.M, van der Vorst, J.G.A.J. (2012), Transparency in complex dynamic food supply chains, Advanced Engineering Informatics, 26(1): 55–65. Wingert, K., Zachary, D.A., Fox, M., Gittelsohn, J., Surkan, J. (2014), Child as change agent. The potential of children to increase healthy food purchasing, Appetite, 81(1): 330–336. Kristína Predanocyová is an internal PhD student in the field of Agrarian Trade and Marketing at the Department of Marketing and Trade of the Faculty of Economics and Management at the Slovak University of Agriculture in Nitra. The scientific research activity of the author is focused on the issue of consumer behavior on the food market with an emphasis on meat and meat products. The author’s aim is to examine and identify trends on the meat market that could affect consumer behavior in the future. The author publishes and presents her research activities at domestic and foreign conferences. The author is also a co-founder of the VEGA research project aimed at examining consumers.

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Ludmila Bahmane


Alexander Demin

e-mail: [email protected] RISEBA University, Riga, Latvia

Instruments of a transmarket approach in building an innovative marketing strategy Abstract. In the process of competition, markets come to a state of equilibrium close to an efficient market. However, new factors in the development of the economy and business, in particular the emergence of the turbulence factor, put this balance in jeopardy. The company in such conditions must constantly develop and adapt using marketing strategies. This article is devoted to the possibility of applying a number of methods of market-to-market interaction by business structures, which strengthen competitive positions in modern markets. Key words: market and state of equilibrium; turbulent business environment; marketing strategies; matrix methods; methods of trans-market interaction

Introduction The world that we know has rarely been stable. Endless political, economic and technological changes constantly form its new contours. In the last three decades, with the onset of the computer era, these changes have become permanent. To conduct business in such conditions becomes especially difficult; in view of the presence of an increasing number of unknown variables, it is impossible to predict a more or less precise value. This situation forms the turbulence of the business environment – the state of world markets in a phase of continuous and unpredictable transformation. In these conditions, it is impossible to guarantee not only prosperity, but also the very existence of a business of any shape or size. Turbulence has always existed, but it is recently that the density of change has increased dramatically, making doing business a very risky venture.

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In these conditions, it is necessary not to follow the changed realities (when change usually happens too late (Gilmore and Pain 1999)), but to anticipate changes with the help of a constantly evolving organization. A key factor in this evolution is the formation of an adequate and adaptable marketing strategy (Harford 2011). This article is devoted to the analysis of the possibilities of using techniques for transforming marketing strategy in the face of turbulence, using the resources of markets where the enterprize does not work directly, but with which it has direct or indirect links – what we will call a “transmarketing approach” (approach, based on the transfer of marketing structures from one market to another). The aim is to define those factors that affect the markets in the present and will affect the future. Let us dwell on those theoretical bases that formed the basis of the methods proposed by the authors. The basis is the assessment of the need for marketing innovations, which involves their targeted search not only on the basis of two-dimensional matrices, but also through the use of a transmarketing approach. This will allow us to evaluate the found ways to make changes in terms of their marketing influence.

1. Current state of markets However, in order to determine where the world can go in the near future, it is worth finding out where the world is now. To begin with, we will determine a number of factors that have already shaped the world market in the form in which we know it, namely: saturation of the markets to the level of effective ones; globalization; the multinationality of the world economy; clustering of business processes; counter-processes, trade wars and anti-globalization (Allen 2016; Lepapa, 2017). Saturation of markets The current state of markets can be defined as close to a state of ideal equilibrium, described by D. Nash in his works on the theory of games (Ritzberger, 2001). Within the framework of this concept, it is possible to extrapolate its conclusions to the consideration of competition in world markets in the form of a global game with the achieved “Nash equilibrium”. As a result of spaces for maneuvering, the players are not sufficient and they concentrate their resources on the most efficient point, occupying that market share that reflects their actual capabilities in a competitive environment.

L. Bahmane, A. Demin: Instruments of a transmarket approach in building an...

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Globalization The world has become global; it is a fait accompli. The processes taking place in the economies of individual countries strongly affect the economies of other countries and the world as a whole. Today, firms in open market conditions compete not so much with local markets as with the supply of the global market. M. Porter in his book International Competition (Porter 1990) described the processes of global competition and globalization, trying to answer the question: What makes some countries export certain goods or services, and ultimately what can it lead to? He singled out four determinants of the competitive advantages of countries: factors of production, domestic demand, related industries and strategies of firms in the market. He particularly emphasized that “companies, and not countries are at the forefront of international competition” and insisted on a global approach to the formation of the strategy (Porter, 1990: 60–65). The diversity of the world economy The world does not consist exclusively of over-developed Japan, the United States, South Korea, Switzerland and Germany with the United Kingdom. Even within individual associations and common markets (for example, in the EU) there is an imbalance in the economic development of individual regions (for example, in Latvia and Bulgaria). In the third world, the situation is even worse. The world has not completely overcome hunger, the spread of dangerous infections, not to mention universal education or ensuring the satisfaction of basic security needs. This generates instability and threatens the existence of both open borders and the common market. Business process clustering Transferring individual industries abroad in search of cost savings is becoming popular, both financially and environmentally, due to cheaper cost of production and increased production, but it has also brought many negative consequences. The decline in production within developed countries, rising unemployment, falling budget revenues and rising taxes and borrowing, which seeks to cover increasingly large social costs, have led to unprecedented increases in the arrears of states. The resulting distortion in international trade and the fiscal policy of large countries is capable of creating an unprecedented economic crisis.

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Anti-globalization processes Fearing the consequences of unfolding globalization, societies tend to oppose it by any means. Unfortunately, often counteractions are chaotic, emotional and at times irrational. In politics, this is expressed by the arrival of populist forces that are pursuing a policy of curtailing globalization and integration processes, introducing protectionist measures and unleashing trade wars. This reduces international trade and exacerbates the already difficult problems, and the circle closes. In markets, instability is growing and a turbulent environment is emerging.

2. Trends that will increase turbulence in the future With all these factors, the world has come to the current state of affairs. However, this does not limit the threats that may affect modern companies. Scientific and technical progress has reached a level that makes it possible for the economy to move to a new development cycle according to Kondratiev (1984). Today, it is possible to single out a number of technologies and processes that change the face of the modern economy: the digitalization of the economy and social life; development of artificial intelligence; individualization of production; ultra-small clusterization of production and industrial regression. Digitalization or digitalization of the economy is the process of the transition of operations and procedures inherent primarily in management processes in a completely computerized form, with subsequent processing of socalled “Big Data” with modern information technology. Artificial intelligence and robot technology in the future, and also, in part, already can replace a lot of jobs in areas in which the work is based on clear algorithms and procedures, and such jobs are the most numerous (Sample, 2014). The spread of such technologies conceals previously unprecedented opportunities to increase the efficiency of companies, as well as unpredictable threats of an economic, competitive, technological and social nature. The individualization of production and consumption leads to the fact that the consumer is increasingly inclined to consume a product that meets the most narrow, individual characteristics, which is a challenge for producers, because it is difficult to use economies of scale in individualized production. In these conditions, even the environment of the sales procedure (such as


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the design of store, the color of package and etc.) is highly important (Traindl, 2007). This all leads to ultra-small clustering of production and industrial regression. The technologies of 3D printing have come to the world (Bird, 2012), the means of production to reach the highest quality of work has become available to a wide range of consumers, and information on the production of certain goods or services (from light industry products to construction operations (Cummins, 2010)) has become public. This leads to the fact that the consumer can produce for himself an absolutely individual product, which in quality will not be inferior to a model made by industrial production, and will often exceed it. There is a regression. Previously all functions of provision by various goods were passed to producers. Now these functions have been returned to the consumer.

3. Searching for marketing strategies using two-dimensional matrices Over the past twenty years, business theory and practice have sought to find marketing solutions to adapt to new market challenges, creating a huge number of such matrices. Many became not only known, but also acquired the form of the standard of an ideal approach in management. This is important, in addition to used and well-known matrices (Porter, Ansoff, Boston, McKinsey, SWOT; Ansoff, 2007). There are a lot of solutions that have not become so well known, in particular the possibilities of the author’s matrix, “solutions novelty – demand for novelty by consumers” (Bahmane, 2005) (Figure 1). In these matrices there were made attempts to see some new features like the state of turbulence and to define the need for adequate and rapid business response.

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Figure 1. Matrix of “Solutions novelty – demand for novelty by consumers” Level of management solutions novelty

Maximum

Minimum

2 Strategy of quality increase (company image strategy, strategy of leadership in the field)

4 Benchmarking strategy (strategy of new products superquality, strategy of world leadership)

1 Strategy of proven quality (product brand strategy)

3 Strategy of new products (strategy of innovator image, strategy of niche leader)

Minimum

Maximum

Demand for novelty by consumers

Source: Bahmane, 2005.

Algorithm for securing a strong position in the foreign market The situation for small- and medium-sized businesses in such small countries as Latvia is complicated in the process of further globalization, which forces them to look for new opportunities in these conditions through exports. The survival of small and medium business in the turbulent and rapidly changing conditions of Latvian market depends entirely on targeted searches for new exporting opportunities by enterprises themselves. The example of the small Latvian company SIA РroВaltic has shown, that in conditions of market internationalization, the use of created databases, as well as the application of screening analysis and matrix methods, allows the optimal marketing strategy to secure a niche in international markets by method of desk studies (Bahmane, 2017) to be found and chosen. The method of screening analysis, that has been mastered through research on 185 Latvian enterprises, indicates that there exists a specific searching algorithm to find an optimal solution with a choice of specific countries and markets, where the products (services) of a company will be able to secure a competitive niche. The main purpose of a company is to secure strong positions on the foreign market, by using maximally fast direct searches for possible marketing solutions How should we behave to market participants to ensure not only the survival of our business, but also its development, as well as the conquest of new niches? Obviously, in conditions of market saturation and higher


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competition, traditional marketing tools (marketing mix, segmentation of markets, positioning, etc.) will not effectively contribute to increasing market share, as some of the possible solutions are lost – they are not visible. So, what should be done in this situation? Help comes in the form of tools to expand the scope of activities. The most famous is the «Blue Ocean Strategy». Blue Ocean Strategy The Blue Ocean Strategy was voiced in the book by Kim W. C. and R. Mauborgne as a fundamentally new and innovative marketing and business strategy (Mauborgne and Kim, 2005). The essence of this strategy is that instead of competing in a saturated market (scarlet ocean), one should create demand in a completely new market, where competition is either absent or minimal. Companies operating in scarlet oceans are ultimately either “eaten up” by their competitors or “suffocated” by the scarcity of the resources in a falling market. In contrast, companies that create blue oceans, i.e. create a non-existent Market at the moment, and find demand in a new, as yet unsaturated market, have the chance not only to survive, but also to multiply their assets, revenues and profits. On an unsaturated market with a low level of competition, the margin is usually the maximum size. A key aspect in the successful implementation of the blue ocean strategy, according to these authors, is the creation of an innovation of value – an innovation that is at the intersection of the desire to increase utility for the consumer and reduce costs. Thus, the blue ocean strategy is based on the creation of the market as such, and not on competition for the market share of the existing one. Lateral marketing A similar concept, but with other methods, is set forth by the classic thinker on modern marketing F. Kotler, in his book Lateral Marketing. The basis of lateral marketing is the creation of innovations by modifying an existing product at various levels of its existence (Kotler and Trias de Bes, 2003; Kotler, 2003, 2004). In the opinion of these authors, it is possible to create an innovative product by applying the technique of “breaking communication”, considering the traditional use, production and distribution of the product and removing one of the elements from the traditional environment. Then, according to the methodology, you should place the element in a new, unlike environment, i.e. according to the author’s methodology, to create a new connection.

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Such modifications should be consistently carried out on three levels of the product’s existence: at the level of the product itself (the modifications concern the product itself – the product or service), at the market level (the modifications concern the marketing of the product in an entirely new market or new market conditions), at the tool level (modifications concern mixed marketing components). Lateral marketing authors contrast with vertical marketing – sets of classical marketing tools (segmentation, positioning, the use of traditional mixed marketing components, etc.). The authors emphasize the orientation of their methodology to expand the opportunities for promoting the company’s products, by creating new markets for it. Meanwhile many authors still consider segmentation as a highly essential part of building a modern and innovative marketing strategy (McDonald 2017). The authors of the article are in agreement with the above methodologies and offer their own version of the use of opportunities that stand outside the traditional markets. The essence of the methodology presented below is to consistently use the patterns and opportunities of related markets with which the company comes into contact in the course of its activities either through direct (cooperation, use of services, competition) or through indirect interaction (markets open to customers, partners and the company’s competitors). Let’s call this approach “Transmarket Interaction”.

4. Diagnosis of the need to transform an enterprise in a turbulent environment Initially, it is necessary to determine in what position the company meets “turbulent times”. Obviously, in conditions of the changing external environment of local and related markets, as well as in the changing internal environment of competitors (both real and potential), companies that have a certain innovative development vector acquire greater stability than those that gravitate toward the conservative approach in management and marketing. Also, it should be noted that in the face of accelerating evolving consumer needs, companies that can quickly switch from the delivery of one product or service to a market that is dying to supply other products and services in emerging and prospective markets will have greater survivability. In other words, the degree of marketing concentration on satisfaction of those or other needs matters. To ensure that the company can safely survive the turbulent times of turbulence, one market in which the company operates is often small.


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The degree of diversification of the company’s activities in various markets is important (Kotler, 2010). Based on the aforementioned, it makes sense to express the degree of potential adaptability of the company in a discrete way by calculating the corresponding coefficient. Calculation of this coefficient is conveniently carried out in matrix form using the matrix of “evolutionary stability” of the company in a particular market. On the X-axis, the degree of the company’s inclination to change is postponed: from 1 (a deeply conservative company) to 9 (an innovative company). On the Y axis, the degree of company concentration on a narrow set of products is postponed: from 1 (concentration on one product) to 9 (output to a specific market for a wide range of products). In this case, each market corresponds to a single matrix. The coefficient is calculated by the formula:

Ke = Ci * Cd (1)

where is the coefficient of evolutionary stability; – the degree of propensity to innovate; – degree of diversification Introducing this coefficient, we accept the assumption that the degree of propensity to marketing innovations and the degree of business diversification have an equal positive impact on the evolutionary stability of the enterprise. Moreover, different quantities of innovation and diversification complement and reinforce each other, so the sought-for coefficient is precisely the product of two indicators. This method is close to using the method of unweighted expert estimates (Sandusen, 2008). The coefficient takes values from 1 to 81 and reflects the value of the company’s ability to survive the period of revolutionary transformation of the market. This indicator can change over time under the influence of strategic marketing decisions. Consider the calculation of this coefficient by the example of American IT companies. As an example, let’s take Yahoo! Inc. and GoogleInc. For time ranges, take the period 1998–2005 and the current period of development of companies (2013–2018) (Kolokoltsev, 2015; Wilkinsky, 2014; Google Wiki, 2018; Funding universe.com, 2013) (“History Of Yahoo!”). We will display estimates of the coefficients of diversification and innovation, and then calculate the coefficient of evolutionary stability. All estimates are presented in tabular form, and then the results are applied to the matrix. The scores on the scales are presented by the authors of the article on the basis of studying the history of the development of the two companies.

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№

1998–2005 г.

2013–2018

Ci

Cd

Ke

Ci

Cd

Ke

Yahoo! Inc.

7

3

21

4

2

8

GoogleInc.

8

5

40

9

8

72

7-9

G

G

Y

Y

4-6 1-3

Degree of diversification


1-3 4-6 Degree of propensity to marketing innovations

7-9


Today, it is enough to look at the state of these two companies these days and compare them. Thus, we see that a company with a large value of the coefficient of evolutionary stability has more chance to overcome the turbulent period in the development of global markets. Google surpassed its competitors and became global leaders because it looked more broadly at those markets that it considered to be targeted, and also paid a great deal of attention to marketing innovations.

5. Transmarket interaction As mentioned earlier, the use of tools, institutions, methods and techniques used in other markets or industries can become one of the marketing techniques to break the deadlock of an efficient market. We are helped by another market or industry. If the competitor plays only in the market, then our “advanced” company has one more field of action. The first company that realizes the full potential of the emerging opportunities will receive a colossal competitive advantage, because it will be several times more mobile than its rivals.


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This is the essence of the use of trans-market interaction. But what can be learned from other markets that will be useful in the competitive struggle in the basic market? Practice shows that you can suddenly learn a lot! You can use the method of work that is used in other industries and apply it to your company. You can find a whole segment of customers that the company or even the industry has not previously serviced, and which, with certain characteristics of the offer, will happily use the services of the company. You can find unexpected partners that will help reduce costs, increase market coverage, expand the range of services offered, and so on. Finally, you can reverse the process. Find a market that has good prospects, but which, for various reasons, is not noticed by investors and apply to it the methods of work of its industry or company. This may be the missing link that will force the whole industry to work effectively. Such diversification can become a source of fairy-tale profits in the future (Porter, 1998). After all, who would have thought that the manufacturer of playing cards for a non-children’s audience would become the leader in the entertainment industry for children and the whole family (Japanese company Nintendo), and the manufacturer of rubber products would become the largest high-tech company and the pride of the whole country (Finnish Nokia). Thus, the method of trans-market interaction is designed to increase the marketing effectiveness of the company. But the question arises: How can you find those markets and industries that can help the company “here and now”? Without a systematic approach, it is obviously not possible to achieve stable and positive results. Therefore, we will offer a way to find target markets, from which you can draw ideas, resources and find partner companies. Let’s call it the “Octopus method”.

6. The „Octopus“ method This method is a reflection of the use of the concept of a trans-market approach. As an example for this method, as well as for another method, which will be described in the next section of the article, let’s take a company which deals with bus transport between cities and countries in Europe – Ecolines company, as well as a representative of the banking market – Raiffeisenbank. At the center of the methodology is the company itself, which is the basis for further analytical moves (the body of an octopus). Furthermore, we need to determine in which markets we can use the market-to-market interaction and what exactly we can pick up.

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To do this, we define adjacent markets, for which we will choose the probability of success for each of the “K” strategies (competition, cooperation and congregation – the collection of useful elements). To determine these markets, we will draw our octopus “tentacles” by answering the following questions: what does the company do (what need does it satisfy), for whom does it do this (customers), where does it operate (localization of the market), how does it do this (way of satisfying the need). These issues form the basis of Abel’s macrosegmentation technology and are fundamental to the market analysis process (Grant, 2008). As these questions are answered, related markets will be identified that meet similar needs that serve consumers from target segments that exist in other territorial sectors, and so on. Adjacent markets can be imagined as a fork, which holds each of the tentacles of the octopus. At the end, each fork has three denticles – these are the sought-after strategies from our 3K set. Furthermore, for each of these related markets, let us designate the feasibility of competition and cooperation with players, as well as the congregation of elements with subsequent adaptation for the needs of the company. To begin with, we will conduct a retrospective analysis to demonstrate that a trans-market approach is already present in the marketing evolution of companies. As an example, we will list the Eastern European divisions of the Austrian financial group RaiffeisenAG. The results of the analysis are presented in tabular form.

L. Bahmane, A. Demin: Instruments of a transmarket approach 209 in building an...

209

Table 1. The use of the “Octopus” method in analyzing the possibilities of market communication for Raiffeisen AG №

Branch tree of the company

Connection link

1

2

3

Adjacent market 4

Feasibility of interaction CompetiCoopera- Congretion tive gation 5 6 7

Commentary 8

1. What does the company do? (key needs) 1.1

Loans

1.2

Payments

1.2

Preservation of capital

Provision of funds

Payments

Secondary lending market (on-lending market)

+

-

-

The market of electronic payments

+

+

+

Cash Payment Market

+

+

-

+

+

+

+

+

+

+

+

+

Cumulative life insurance

+

+

-

Insurance for travelers abroad

-

+

+

Supplementary health insurance. Use of scoring algorithms inherent in the insurance market

Savings The market of cumulative on payments discount Preservation Brokerage services market of funds from inflation Multiplication Insurance market of funds Markets adjacent Saving money to the tourist Protection of wellMedical insurance market -being and well-being

The service of on-lending to customers of other banks and financial structures Acceleration of payments to the speed of electronic money, increased reliability of transactions due to the status of the bank Expanding opportunities for non-cash payment through the development of the bank’s infrastructure and partner programs „Mile” cards, the accumulation of discounts and bonuses as the use of bank products Providing services for capital investment in stock markets

2. For whom does the company work? (key segments) 2.1

Persons

Leisure

The market of entertaining actions

-

+

-

Providing clients (mostly premium) with information about cultural and recreational activities in their region of residence

210 1

2.2

Chapter 3. Marketing in the Organization Chapter 3. Marketing in the Organization 2

Companies

3

4

5

6

7

Shopping

Market of goods and services for personal use

-

+

+

Speed and ease of maintenance

The market of banking services for physical persons

-

+

+

8 Providing customers of the bank with various discounts, information about sales in partner companies of banks Complex service packages for employees of the client company. Issue of bank cards in the name of the company (with all the privileges and functions of cards for physical persons)

4. How the company works (ways to meet the needs of customers) 4.1

Service Method

In the bank branch

Government Services Market The market of services to the population

-

-

+

Remotely

The Internet Trade Market

-

-

+

On the territory of the client

Motor Insurance Market

-

-

+

Use of preliminary distribution of clients on their requests and service in the framework of electronic queues The bank borrows the convenience for the consumer inherent in Internet commerce and turns its Internet portal into a fully-fledged store of banking products The bank borrows the practice of servicing clients on its territory practiced by many insurance agents


Based on the aforementioned information, it can be seen that the processes of trans-marketing interaction have an impact on the evolution of the provision of services to the consumer. Now we will carry out the same analysis in order to identify potential changes in the company’s operations that may be implemented in the future. As an example, let’s take Ecolines.

L. Bahmane, A. Demin: Instruments of a transmarket approach 211 in building an...

211

Table 2. The use of the “Octopus” method in the analysis of the possibilities of market communication for the company Ecolines №

Branch tree of the company

Connection link

Adjacent market Competition

1

2

3

4

1.1

Transports passengers from one point to another

Feasibility of interaction Coopera- Congrega- Congregative tion tion 5 6 7

Commentary 8

1. What does the company do? (key needs) Transportation

The taxi market The market of local transport and other public transport (metro, tram, etc.) Freight Market

1.2

Feeding on board

Ready food and beverages

Market of products

Fast food market

-

+

+

Cooperation, the use of aggregators

-

+

+

Using flexible payment system

-

+

+

-

+

-

Improving the supply of passengers

+

Providing passengers with a number of products on board or at intermediate stops, cooperating with the largest fast food chains

+

+

2. For whom does the company work? (key segments) 2.1

Tourists

Travels Shopping

2.2

EU residents

Experience Convenience

Market Placement Insurance market Souvenir market The market of durable goods Market of excursions and events

+ +

+ + + + +

+ + + +

The entertainment market

-

+

+

Mirror transfer Insurance on board Tickets in the form of a souvenir Sale of goods in transit Dating on board with the help of social networks

212

Chapter 3. Marketing in the Organization Chapter 3. Marketing in the Organization

1

2

3 Economical

4 The market of local transport and other public transport (metro, tram, etc.)

5

6

7

-

+

+

8

3.Where does the company operate? (localization of the main market) 3.1

ЕС

Baltic region Germany Western Europe Eastern Europe

3.2

Russia Belarus and Ukraine

European transport market Regional transportation market European transport market Regional transportation market European transport market Regional transportation market European transport market Regional transportation market Local transportation market Local transportation market

+ + + + + + +

+ + + + + +

+ + + + + + -

The regional section of the market repeats all other sections and all activities developed for the previous sections can be used in other regions (taking into account local specifics)

4. How the company works (ways to meet the needs of customers) 4.1

Way of transportation

Air Water Land


The market of air transportation The market of river and sea transportations

+

+

+

-

+

+

The market of railway transportation

+

+

+

Use of order of service, typical for flights Use of the order of service, characteristic for cruises Use of the order of service, characteristic for railways


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As a result, we have a set of plusses, i.e. opportunities to use the option of interaction in a related market. Each such plus as a result of the creative work of the marketer is transformed into an element that can be used in the marketing activities of the base company. Approaches to innovations obtained as a result of this type of analysis are consistent with the position of Philippe Kotler and his colleagues (Kotler et al., 2010; Kotler and Trias de Bes, 2014; Kotler et al., 2017) on the evolution process in modern marketing, as well as with JTBDmarketing positions (Ulwick, 2018, 2016).

7. Evaluation of the received projects of marketing innovations After receiving the project ideas on marketing innovations, obtained as a result of using the “Octopus” method, the question arises about their evaluation. But any evaluation must have its own criteria. Because we are dealing with new approaches to business management, the use of practical results is not possible because we first of all need to answer the question: “Is it worth trying out these innovations in each case?”. Introducing an innovation without initial assessment is an unreasonably risky step (Shaw and Kotler, 2016). The solution to this problem can be the use of the criteria for the “Jobs to be Done” (Ulwick, 2016) marketing approach. This approach is based on the assumption that when segmenting the market and positioning on it, it is necessary to determine the needs that the consumer wants to satisfy with the maximum benefit for himself (greater than that offered by competitors). Using this approach, it is possible to ask of each such innovation the question about whether its implementation will satisfy new needs and (or) increase the benefit to the end user. If the answer is negative, then the innovation has no prospects for implementation. If the answer is yes, then the next question is: Can the company, within the existing product, implement this innovation or will it require the development of a new product? In the first case, we will have a case for renovation, in the second with a case for innovation, with all the accompanying consequences (Takaoka, 2017). After positive evaluation, the best innovation ideas should be checked by methods which are highly similar to those which are used for the experimental products. At this period, customer feedback is essential for any marketing innovation (Alvarez, 2014). Even after the installing of checked and

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positive marketing innovations the “Octopus” method should be used regularly to accomplish Deming’s cycle (Deming, 1984). In the example of Raiffeisen Bank, the company introduced a number of renovations and innovations with a constant increase in the coverage of customers’ needs. In the example of the company Ecolines, according to this approach, first of all it is necessary to pay attention to the innovations marked in green.

Conclusions We live in a period of global change. As already mentioned, processes such as globalization, the revolution in information technology, industrial clustering and other processes have forever changed the landscape of modern markets, exacerbating the level of competition and leading it to the equilibrium of efficient markets. However, this equilibrium and the players who have established it are threatened by new trends in the transformation of modern life: widespread walking robotization, digitalization, further industrial clustering, and tougher demands of consumers for modern products. In parallel, a counter-reaction to the already accomplished transformations of globalization is growing. The paternalization of societies, the arrival of populist movements to power in a number of countries, trade and currency wars, all this threatens the existence of modern markets and companies no less than the unfolding new wave of Kondratieff. In these conditions, the company’s ability to adapt its marketing strategy to the conditions of a changing world becomes especially important (Pantaro et al., 2018). It has become clear that battles for existing markets cannot allow the company to find a stable position and ensure its survival in the turbulence of markets. Only the creation of new markets, products and methods of their promotion can allow companies to hope for existence in the future (Belz et al., 2010). In this article, a brief evolution of this marketing direction was presented in the form of a description of two theories – the theory of blue ocean strategy and the theory of lateral marketing. Continuing the ideas of colleagues, the authors of the article proposed, on the basis of their theories, a concept adapted to the needs of the ordinary company. The approach of the trans-market interaction, in which the methodology of the Octopus analysis was presented, when applied to the needs of a specific company, can become the source of new ideas for the formation of a marketing strategy, as well as to increase the flexibility and adaptability


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of the existing strategy, which is so necessary in conditions of great turbulence for modern markets.

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Kotler, P. (2010), The quintessence of strategic marketing, Berlin: Springer. McDonald, M. (2017), Market segmentation: still the bedrock of commercial success, The Marketing Journal, available at: http://www.marketingjournal.org/market-segmentation-still-the-bedrock-of-commercial-success-malcolm-mcdonald, (accessed 11 October 2017). Medium.com (2017), The history of Yahoo! From hobby to internet sensation, available at: https://medium.com/greatepicurean/the-history-of-yahoo-edf6ebfc725, (accessed 18 February 2017). Mauborgne, R., Kim W. C. (2005), How to create uncontested market space and make the competition irrelevant, MA, USA, HBS. Pantano, E., Bassano C., Priporas C.V. (2018), Technology and innovation for marketing, London, Taylor and Francis. Porter, M. (1990), The competitive advantage of nations, New York: The Free Press. Porter, M. (1998), Competitive strategy, New York: The Free Press. Ritzberger, K. (2001), Foundations of non-cooperative game theory, Oxford: Oxford University Press. Sandusen, R.L. (2008), Marketing, New York: Barron’s. Shaw, R., Kotler, P. (2016), Optimizing marketing: the ideas-to-demand chain, The Marketing Journal, available at: http://www.marketingjournal.org/optimizingmarketing-the-ideas-to-demand-chain-robert-shaw-and-philip-kotler, (accessed 6 June 2016). Takaoka, K. (2017), Marketing & innovation in the 21st Century, The Marketing Journal, available at: http://www.marketingjournal.org/marketing-innovation-in-the-21st-century-kohzoh-takaoka-ceo-nestle-japan, (accessed 05 September 2017). The African exponent (2017), The major problems that Africa is facing today, available at: https://www.africanexponent.com/post/8304-poor-governance-corruption-and-insecurity-major-problems-confronting-africa, (accessed 05 April 2017). The Financial Times (2012), Exploring the 3D printing opportunity, available at: https://www.ft.com/content/6dc11070-d763-11e1-a378-00144feabdc0#axzz24gFn 5Cal, (accessed 30 August 2012). The Guardian (2016), Trump’s economic policies: protectionism, low taxes and coal mines, available at: https://www.theguardian.com/us-news/2016/nov/09/ trumps-economic-policies-protectionism-low-taxes-and-coal-mines, (accessed 09 November 2016). The Guardian (2017), Google’s deep mind makes AI program that can learn like a human, available at: https://www.theguardian.com/global/2017/mar/14/googlesdeepmind-makes-ai-program-that-can-learn-like-a-human, (accessed 14 March 2017). Traindl, A. (2007), Neuromarketing, Vienna, Trauner Verlag. Ulwick, A.W. (2016), Jobs to be done: theory to practice, Idea Bite Press. Ulwick, A. (2018), The limits of milkshake marketing, The Marketing Journal, available at: http://www.marketingjournal.org/the-limits-of-milkshake-marketing-anthony-ulwick, (accessed 22 February 2018).


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Ludmila Bahmane, PhD, is Associate Professor at Riga Aviation University and Assistant Professor at RISEBA University, Riga, Latvia. Her research interests are marketing management, projects and marketing research commissioned by the Latvian government (2007), Latvian business structures (mass polls for 1500 people before and after joining the EU), using new cluster, matrix methods, screening analysis, teaching in universities in Latvia over the last 30 years.

Alexander Demin is developing projects (incl. marketing issues) in industrial ecology, CEO at Ecoventureinvest Ltd. and Ecosfera Ltd. in Moscow. Research interests include strategic marketing, creation of new markets, marketing innovations, ecoligical and “green” energy marketing issues, Greenomics (“green” economics). He is a student at RISEBA.

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Chapter 4.

Financial, legal and IT aspects of management 1. Katarzyna Sieradzka: Sources of financing for development of startups in Europe 2. Josef Kašík: Correlation between corruption and GDP in European countries 3. Elvira Nica, Jana Klieštiková, Mária Kováčová: Legislative challenges for insolvency management in V4 countries 4. Olaniyi Evans: Digital government: ICT and public sector management in Africa

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Chapter 4. Financial, legal and IT aspects of management

221

Katarzyna Sieradzka

e-mail: [email protected] University of Technology and Humanities in Radom, Poland

Sources of financing for development of start-ups in Europe Abstract. Start-ups are newly created companies exposed to above-average market risk, offering innovative products or services without having a crystallised business model. Start-ups, facing limited access to the formal capital market, look for an alternative, that is, the informal market of capital investors, venture capital funds, and the increasingly popular crowdfunding. It is the objective of this paper to analyze and evaluate sources of financing for European start-ups, with particular emphasis on the situation in the Polish market. Key words: business undertakings; sources of financing enterprises; start-ups

Introduction Globalisation of the contemporary economy and highly intensive development of telecommunications provide even the smallest enterprises with extensive opportunities for expansion to the international market (ignoring any barriers, both political and geographical). In effect, businesses offering intangible products in the virtual environment of the global market gain importance. These are commonly start-ups, characterised by above-average development and growing market interest. It is the objective of this paper to analyze and evaluate sources of financing for start-ups in the European market. To this end, the following research hypotheses are adopted: H1: Development of start-up enterprises requires specific sources of financing; H2: Founders’ equity and funds from family and friends are the key sources of capital for start-ups; H3: Alternative forms of financing constitute a major source of capital for start-ups as new, innovative business initiatives.

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For the purposes of attaining the objective and demonstrating the hypotheses, data and information in papers and reports by Polish and European institutions and organisations like: European Start-up Monitor 2015, 2016, Polskie startupy 2015, 2016 (Start-up Poland Foundation), and Diagnoza ekosystemu startupów w Polsce (Deloitte) are analyzed and the specialist literature is reviewed.

1. Development of start-ups in Europe In both economic theory and practice, the concept of a start-up is abused to denote all and any businesses in the initial phases of their development. The literature offers a number of definitions that are not consistent with one another and stresses diverse features of these businesses (Table 1). Blank and Dorf`s definition of a start-up as an undertaking in search of a value creation concept as its target model is among those most commonly recognised. Table 1. Selected definitions of start-ups Author

Definition

Blank, Dorf (2013: 50)

A start-up is a temporary organisation seeking a profitable, repeatable and scalable business model

Ries (2011: 37)

A start-up is a human institution established to build new products or services in conditions of extreme uncertainty

Sieradzka (2017: 39)

Start-ups are micro or small businesses that offer innovative products or services, operating in the market in the short term and characterised by above-average risk levels

European Startup Monitor (2016: 5)

Start-ups are enterprises below 10 years in the market which apply innovative technologies and business models and strive for dynamic growth of development and sales

Beaucham, Kowalczyk, Skala (2017: 9)

Start-ups are undertakings with potentially very fast growth owing to a technological advantage or market niche that has not been discovered and explored. These are firms designed to reach enormous scale in the short term


The definitions emphasise the following characteristics of start-ups: initial phase of development, capacity for learning, search for a concept of a profitable, repeatable and scalable business model, high potential for dynamic, above-average growth owing to a technological advantage or market niche, innovativeness, and operation in conditions of extreme uncertainty,

K. Sieradzka: Sources of financing for development of start-ups in Europe

223

which add up to a unique image of start-ups as distinct from other entities commencing their business activities. Studies into European start-ups have been conducted since 2015 by the European Startup Monitor (ESM), established by the EU Commission for Digital Economy and Digital Society. Three features of such enterprises were determined for the purposes of the study: –– young age; –– innovativeness; –– dynamic growth. The ESM 2016 report shows most start-ups (65%) operate in the market for up to three years, with merely 9% of enterprises having longer histories of between seven and ten years. Statistics indicate Polish enterprises are among the youngest in Europe – aged below two years (European Startup Monitor, 2016: 22). The innovative nature of start-ups is demonstrated by innovation of their products. Nearly 90% of European start-ups note their products are market novelties. More than a half claim they are innovative globally, 16% in the European market, and 22% in the domestic markets. Almost a half of the enterprises (43%) offer technological innovations. Organisational and process innovation applies to 64.7% and 63.5% of European start-ups, respectively. European start-ups function in high technology industries like: IT/software development (15%), software as a service (SaaS – 12%), industrial technology/production/hardware (8%), consumer mobile/web application (7%), e-commerce (7%), bio-, nano-, and medical technology (6%), finance/finance technology (5%). The remaining 40% of start-ups comprise counselling firms and businesses in sectors such as: education, food, games, commerce, ‘green’ technologies (European Startup Monitor, 2016: 25). The sectoral structure is comparable in the Polish conditions. Overall, 14% of start-ups build business software, 37% sell software services and are active in sectors like: mobile applications – 14% e-commerce – 14%, and Internet services - 9%. Nearly three times as many start-ups sell their services to corporate rather than private customers (B2B – 51%, B2C -18%) (Skala and Kruczkowska, 2016: 24–27). Start-ups exhibit high development dynamics in respect of employment and sales income, European and Polish studies suggest. Despite their young age, these enterprises hire an average of 12 people, including nine employees. Most staff are employed by start-ups in Northern Europe (Switzerland, Finland, Germany, France), fewest in Southern Europe (Greece). Eight are

224


employed by an average start-up in Poland, including three owners. European start-ups plan to boost their staffing by nearly six in the next 12 months on average. The increase is to be above-average in Finland, Belgium, Germany, and Poland: by 8.2, 6.8, 6.6, and 6.3, respectively. Rapid development of start-ups is shown by rising income as well. The Polish report says almost every third start-up among 322 studied experiences an income growth of more than 50% a year and every fifth by more than 100% (Skala et al., 2015: 80). The start-up enterprises defined above have become the engine of the world economy in the last two decades. Notably, companies like Amazon, Google, Facebook, Twitter, Groupon, Uber, or Xiaomi did not exist as early as a dozen years ago, while their current incomes are huge. Uber is the most expensive start-up not only in the USA but also worldwide. ‘The business founded by Travis Kalanick is valued at US$ 68bn, with an enormous (above US$ 20bn) advantage above the global number two – the largest Chinese start-up, the electronics manufacturer Xiaomi’ (Hartmans, 2017). It should be noted that “the American GNP is 15 billion dollars. Nine technology firms (Apple, Amazon, Google, Salesforce, VMware, Facebook, Twitter, Groupon, and Zynga) have produced nearly a billion dollars’ worth of new goods” (Kubiński and Ropuszyńska-Surma, 2017:114). This dynamic development of start-ups is compared to a “Cambrian explosion” (Siegele, 2014). Its main factors include: reduced costs of creating start-ups, easier access to sources of financing, unconventional methods of management, easy and fast access to new technologies (Global Startup Ecosystem Ranking,2015: 14). Start-ups must be said to be a unique type of enterprise. They display high innovation and high growth dynamics on the one hand and are exposed to considerable external threats that often lead to winding-up due to scarce initial resources and weak market footing, on the other hand. Challenges to such businesses need to be analyzed, therefore (Figure 1) sales growth and customer acquisition invariably remain the biggest of them. Product development and capital acquisition are equally important. Interestingly, improving liquidity and profitability are less significant to the future development of a firm.

225


Figure 1. Current challenges facing European start-ups Other challenges Profitability

001%

004% 006% 004%

Cash flow/liquidity

005%

Team development

003% 005%

Interna�onaliza�on Recrui�ng

008%

2016 2015

006% 005% 006% 007% 006% 007%

Process/internal organiza�on Growth Product development

014% 012%

Raising capital

017%

016% 020% 020%

Sales/customer acquisi�on 000%

017%

013%

005%

010%

015%

020%

025%

Source: own elaboration on the basis of ESM: 2015, 2016.

The environment, referred to as the ecosystem, plays a crucial role in the development of start-ups. It denotes links and cooperation between people, enterprises, support organisations and institutions intended to assist with creation and development of innovative undertakings. This is a “system of entities aiming to make new products and services in conditions of high uncertainty using available resources and operating in a specific regulatory environment” (Deloitte, 2016: 4). The ecosystem consists of five key areas of support: financing, legal regulations, human capital, social capital, and institutional environment. Financing is exceptionally important at every stage of undertaking development, though it must be remembered the demand for this type of support changes as they develop.

2. Development of European start-ups and sources of financing A majority of start-ups are micro and small enterprises that commence their business based on an innovative idea. Since they have a limited access to the formal capital market, start-ups look for alternatives including: informal investors, high-risk, chiefly venture capital funds, and the increasingly popular crowdfunding.

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It should be pointed out a start-up’s requirement for sources of financing varies at successive stages of development. Ripsas and Tröger (2015) distinguish five stages of start-up development: Seed Stage, Start-up Stage, Growth Stage, Later Stage, Steady Stage. Characteristics of the individual stages are close to the model proposed by Deloitte (Deloitte, 2016: 16) and the authors of the report Polskie Start-upy 2016 (Skala and Kruczkowska, 2016: 20). Bootstrapping, that is, financing with own savings based on overdraft limits and loans from family, friends and those believing in the success of an undertaking, plays a special role in the first development stage or the so-called seed stage (Ebben and Johnson, 2006: 851–865). At the start-up and growth stages, alternative sources of start-up financing become a possibility – venture capital (VC) funds, business angels (BA), and crowdfunding. The potential for bank loans/ credits is highly limited at the initial stages of development due to absence of collateral and high risk of failure. Their availability improves at subsequent stages, yet they remain an expensive source of financing. In the phases of expansion and stabilisation, when a start-up achieves market success and prepares for a floatation, not only VC funds, but also private equity funding and bank crediting emerge as viable options. Venture capital funds are closed-end, with a group of investors allocating their capital to the development of enterprises which are most often at the early stages of their development and characterised by high risk but capable of generating high returns. “Venture capital is equity contributed for a limited time by third-party investors to small and medium enterprises having products, manufacturing methods or services that pose great risks of investment failures but, if an undertaking supported by the investors proves successful, they provide a dramatic rise of invested capital to be realised by selling shares” (Węcławski, 1997: 17). VC funds normally invest in innovative projects based on state-of-the-art technologies. These investments offer the advantage of financing risky undertakings that would not be eligible for classic sources of financing, e.g. bank crediting. Extensive knowledge and qualifications of managers (used in the development of an undertaking) are added assets of such funds. Investments by venture capital funds boost a firm’s credibility in the eyes of other funds and institutions (e.g. banks). Key drawbacks comprise valuations lower than in public offerings and unavailability of specialist know-how transfer (which is the case if an investor from the same sector is attracted). Informal private investors, known as business angels, increasingly often enter the market gap created by capital shortages. These are private individuals who invest their own financial resources in new, commonly innovative


227

business undertakings at the early stages of development (Sieradzka, 2011: 74). Besides financial support, they offer expert advice, their own expertise, qualifications, knowledge of the market, know-how, and business contacts. BAs are people with market success to their names, thus they know the market and understand the risk, so are able to provide effective assistance with founding and managing an enterprise and building its development strategy. In return, business angels expect a share in profits of the enterprise. “Business angels are entrepreneurs and captains of industry of substantial professional experience, with considerable private assets earned with their own efforts, and independently investing their savings for several years at arm’s length in shares of unquoted small and medium enterprises at early stages of development and offering significant potential for value growth”(Tamowicz, 2007: 7). The role of a business angel is not limited to functions of a key capital provider, therefore. They fulfil essential functions in supporting innovation and building the competitive edge of an enterprise. Crowdfunding is the most recent form of financing for often unconventional, innovative projects. It means a way of collecting capital among the Internet community to finance a new undertaking in return for a prearranged consideration (e.g. a share in profits from a project). Any business, scientific, cultural or social undertaking may be a project. In business, for instance, it could be the establishment of a new firm or launch of a new product/ service. This form of financing is characterised by a high number of investors (donors) who contribute small sums. The collection is managed via specialised Internet platforms. “Crowdfunding is a kind of capital collection and allocation for the purposes of development of a specific undertaking in return for definite performances which involves an extensive grouping of capital donors, is characterised by use of telecommunications technologies, lower entry barriers and better transaction terms than those generally available in the market”(Król, 2011: 37–38). Donation-based crowdfunding is best for early start-ups as its operational flexibility is maximum compared with other forms of this financing. Debt-based crowdfunding, where capital is to be repaid, is the optimum solution for the initial stage. In turn, equity crowdfunding that guarantees a share in an enterprise’s profits to investors, may be away of financing in the growth phase (Paschen, 2017:179–188). Start-ups take advantage of many other forms of financing apart from the alternative sources discussed above. These clearly include EU funding, business accelerators and incubators. Data concerning sources of financing for start-up enterprises in Europe show distinctly founders’ own funds are the main and fundamental source. They constituted the default ‘financial starting package’ for nearly 85%

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of enterprises in 2016 (Figure 2). Funds obtained from family and friends are the second most common source of development financing (30%). State subsidies and grants are another major source of financing (27%), especially in Austria and Germany. Start-ups on the lookout for additional funding take frequent advantage of assistance by business angels and venture capital funds – 24% and 18%, respectively. Financial support offered by institutions of the business environment, i.e. incubators or accelerators, is utilised to a similar extent (16%). This is particularly true of Finland, where more than 70% of start-ups examined used this form of support. Bank lending and crediting are among minor sources of funding at early stages of enterprise development, due to the absence of crediting histories and collateral and high risk, inter alia. Research suggests community financing, that is, crowdfunding, plays a rising role in the development of start-ups, which is especially notable in Finland and Poland. This is a relatively new source of financing in Europe; therefore, the level of its engagement (3.6%) points to its growing significance in the funding of start-ups today and in the future.


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Figure 2. Sources of financing for activities of European start-ups. Countries with highest levels of a given source of financing in 2016. Savings of founders

EUROPE (ESM 2015) EUROPE (ESM 2016) Switzerland Ireland

61,9% 84,5% 96,8% 92,5%

Family and friends

25,1% 29,6% 57,1% 38,5%

EUROPE (ESM 2015) EUROPE (ESM 2016) Switzerland Greece

Goverment subsidies (government funding)

21,9% 26,5%

EUROPE (ESM 2015) EUROPE (ESM 2016) Austria Germany

Business Angels

55,4% 35,5%

EUROPE (ESM 2015) EUROPE (ESM 2016) Finland Switzerland

21,3% 23,8% 56,0% 46,0%

Internal financing (opera�ng cashflow)

EUROPE (ESM 2015) EUROPE (ESM 2016) Finland Belgium

14,8% 18,6% 52,0% 25,9%

Venture capital

12,6% 38,2% 44,0% 30,8%

EUROPE (ESM 2015) EUROPE (ESM 2016) Finland Poland

Incubator/ company/ builder/ resourses

13,5% 16,2%

EUROPE (ESM 2015) EUROPE (ESM 2016) Finland Slovenia

Bank loans

76,0% 39,2% 9,3% 14,4% 32,0% 20,8%

EUROPE (ESM 2015) EUROPE (ESM 2016) Finland Spain

3,8% 3,6% 8,0% 7,7%

EUROPE (ESM 2015) EUROPE (ESM 2016) Finland Poland

Ventura debt

1,9% 1,9% 8,0% 7,8%

EUROPE (ESM 2015) EUROPE (ESM 2016) Finland Slovenia

Other capita;

4,7% 1,9%

EUROPE (ESM 2015) EUROPE (ESM 2016)

Crowdfounding

2015

Source: European Startup Monitor 2015, 2016.

2016

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It should be pointed out that a fifth of the start-ups (22.5%) only take advantage of their own resources (Figure 3). Such businesses are referred to as bootstrappers. This is feasible since they rely on the work of their founders. Their dedication occasionally pays: start-ups using exclusively their own resources generate regular income faster than others. This confirms the rule that bootstrappers are more cautious about fixed spending like salaries and are quicker at earning profits as they have no alternatives to support their businesses. Figure 3. Equity as the sole source of financing start-ups in Europe: top five countries 22,5% 53,1% 47,6% 35,1% 34,3% 28,4% 22,5% 55,8% 52,3% 37,5% 37,2% 31,4%

ESN 2015 1. Romania 2. Czech Republic 3. Belgium 4. Poland 5. Austria ESM 2016 1. United Kingdom 2. Greece 3. Ireland 4. Cyprus 5. Slovenia

Source: European Startup Monitor 2015, 2016.

In 2015, a majority of enterprises utilising only their own funds were based in Central and Eastern Europe, chiefly Romania, the Czech Republic and Poland. In more developed countries like France or Germany, founders of start-ups had easier access to and were more willing to use sources other than their own savings. Although the level of start-up funding with their own savings has remained steady (22.5%), the list of countries where most start-ups employ their own resources has changed. It encompasses start-ups from the UK, Greece, Ireland, Cyprus, and Slovenia, possibly a result of the economic and political crisis in at least the latter two.

3. Sources of capital in Polish start-ups Looking for sources of funding for new enterprises is a major challenge to their owners. It determines survival and development of these firms in the market. A high significance of own resources in the development of start-ups in Poland is evident. Half the enterprises finance their operations exclusively with their own funding, with almost 80% of those studied declaring their own


231

resources (including sales income) are committed. This points to a pronounced rise since 2015, when 59% of businesses employed their own funding (Figure 4). This matches Europe-wide trends of above 80% development resources derived from owners’ capital (Figure 2). This is mainly due to a high risk stage of an undertaking’s development, and limited opportunities for securing external funds. When forced to resort to third-party resources, owners of Polish start-ups take advantage of the European Union and venture capital (VC) funding. Numbers of enterprises utilising both the options have increased by 1 percentage points and 4 percentage points, respectively. The rising involvement of VC funding is of special interest as numbers of such funds are growing and assumptions of operational programmes in Poland are being implemented from 2014–2020. The remaining sources of development financing are used to limited degrees. This applies to bank financing and crowdfunding. The causes of the former situation relate to severely restricted or non-existent collateral and credit histories and the above-average business risk at the first stage of development. Studies of community funding point to its short history with regard to start-up financing, particularly in the European market. Nevertheless, 3.6% of European enterprises have taken advantage of this possibility (Figure 4). Research implies 2% of Polish enterprises stated crowdfunding is a source of their financing. The extent of its utilisation has shrunk a little; nonetheless, the status of the phenomenon in the Polish market is appropriate to European trends. Accelerators and strategic investors, contributing 6–7% of support, are new sources of start-up funding (first noted in the 2016 survey). Figure 4. Sources of start-up financing in Poland from 2015–2016 (multiple choice) Accelerator

7%

0% 0%

6%

2% 3%

Crowdfunding

6% 8%

Bank credi�ng

2016

17% 20%

Business Angel

2015

22% 18%

Venture capital

24% 23%

EU subsidies Own sources

79%

59% 0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Source: own elaboration on the basis of: Raport, Polskie startupy 2015, Startup Poland, Raport, Polskie startupy 2016, Startup Poland, (online) http://www.startup. poland.pl (accessed 12 September 2017).

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Despite the prevalence of own resources in start-up financing, external capital is necessary for development of such undertakings. Overall, 75% of those reviewed pointed to their needs and plans for applying for third-party capital. Owners of start-ups declare venture capital (VC) funds and EU subsidies will be the key sources of external financing. Such plans are stated by 59% and 56% enterprises, respectively. Every third enterprise counts on a business angel (35%). Plans to resort to bank crediting are admitted by a tenth of firms. In spite of the low (2%) commitment of crowdfunding to start-up development at present, 11% of enterprises intend to secure funding from this particular source (Figure 5). Figure 5. Planned external sources of financing start-ups in Poland Venture capital 59%

EU subsidies 56%

Other

16%

10% 35%

Bank credi�ng 11%

Crowdfunding

Business angel

18%

Accelerator

Source: own elaboration on the basis of: Raport, Polskie startupy 2016, Startup Poland, (online): http://www.startup.poland.pl (accessed 12 September 2017).

Conclusions Start-up enterprises are micro or small businesses that offer innovative products or services, operate in the market for short periods of time, and are liable to above-average risk levels. Such economic undertakings need an


233

efficient environment, known as the ecosystem, for their development. Financing is one of its parts. The nature of financing for newly-formed innovative undertakings boils down to finding monies for projects with (in a majority of cases) capital requirements in excess of assets held by entrepreneurs/ owners. Funding is secured on condition of demonstrating business plans are forward-looking, viable and supervised by competent management. In connection with characteristics of start-ups that include the early stage of development, above-average risk levels, and innovativeness, such firms search for alternative sources of financing for their activities. These include informal investors, high-risk, mainly venture capital, funds, and increasingly common community funding. The analysis presented in this article leads to the following conclusions: –– Specialist literature fails to offer a single universal definition of a start-up, which hinders analysis of the market circumstances to a considerable extent. –– Appropriate matching of a financing strategy to a stage of an undertaking’s development is a fundamental prerequisite of market success. –– Founders’ equity and monies borrowed from family and friends, as well as alternative sources like venture capital funds, business angels, and crowdfunding play special roles in the financing of start-up development. –– Founders’ equity is the chief and basic source of financing for operations of European start-ups. It was the ‘financial starting package’ for nearly 85% enterprises in 2016, with a fifth (22.5%) relying solely on their own resources. –– State grants/ subsidies (27%), business angels’ capital (24%), and venture capital funds are significant alternative sources of financing for European start-ups (18%). –– Analysis concerning sources of financing for operations of Polish start-ups produces results that are not dissimilar to those concerning their European equivalents: 1. Polish start-ups tend to finance their activities with their founders’ assets (79%), 2. EU subsidies (24%), venture capital funds (22%), and business angels’ capital (17%) are the most common alternative sources of financing. –– Sources of funding for start-ups in Poland are relatively poorly developed, as proven by low savings, scant numbers of formal and informal investors like business angels and VC funds, and

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underdeveloped environment to support their development (the socalled ecosystem). –– Most (75%) Polish start-ups intend to apply for third-party capital, primarily including venture capital funding.

References Beaucham M., Kowalczyk A., Skala A. (2017), Polskie startupy 2017, Warszawa: Fundacja Startup Poland, available at: http://www.startuppoland.org., (accessed10 April 2018). Blank, S., Dorf, B. (2013), Podręcznik startupu. Budowa niewielkiej firmy krok po kroku, Gliwice: Helion. Diagnoza ekosystemu start-upów w Polsce, (2016), Deloitte, available at: https://www.deloitte.com, (accessed 10 September 2017). Ebben, J., Johnson, A. (2006), Bootstrapping in small firms: an empirical analysis of change over time, Journal of Business Venturing, 21: 851–865. Hartmans, A. (2017), Klub dziesięciu miliardów. Oto najdroższe startupy na świecie, Business Insider, available at: https://businessinsider.com.pl, (accessed 3 September 2017). Kowalczyk, E, Skala, A. (2016), Polskie startupy. Raport 2016, Warszawa: Fundacja Startup Poland. Król, K. (2011), Crowdfunding. Od pomysłu do biznesu, dzięki społeczności, Warszawa, available at: http://crowdfunding.pl, (accessed 12 September 2017). Kubiński, P.P., Ropuszyńska-Surma E. (2017), Rola instytucji otoczenia biznesu w kreowaniu sieci współpracy i rozwoju przedsiębiorstw typu start-up, Zeszyty Naukowe Politechniki Śląskiej, Seria: Organizacja i Zarządzanie, 103: 109–128. Paschen, J. (2017), Choose wisely: crowdfunding through the stages of the startup life cycle, Business Horizons, 60: 179–188. Ries, E. (2011), The lean startup: how today’s entrepreneurs use continuous innovation to create radically successful businesses, New York: United States by Crown Business. Ripsas, S., Tröger, S. (2015), DSM – Deutscher Startup Monitor 2015, available at: www.deutscherstartupmonitor.de/, (accessed 30 April 2018). Siegele, L. (2014), Tech startups: the Cambrian moment, The Economist, 17 June, available at: https://www.economist.com, (accessed 12 September 2017). Sieradzka, K. (2011), Significance of business angels in development of innovative undertakings, in: A. Wolak-Tuzimek, K. Sieradzka (eds), Enterprise facing the challenges of the global economy, Radom: Wydawnictwo Politechniki Radomskiej. Sieradzka K. (2017), Sources of financing for innovative business activities in Poland, Central European Review of Economics and Finance, 22(6):39.


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Skala, A., Kruczkowska, E., Olczak M.A. (2015), Polskie startupy 2015, Warszawa: Fundacja Startup Poland, available at: http://www.startuppoland.org., (accessed 10 April 2018). Skala A., Kruczkowska E. (2016), Polskie startupy 2016, Warszawa: Fundacja Startup Poland, available at: http://www.startuppoland.org., (accessed 10 April 2018). Tamowicz P. (2007), Business angels. Pomocna dłoń kapitału, Warszawa: PARP. The Global Startup Ekosystem Ranking 2015, available at: https://ec.europa.eu/futurium/en/content/2015-global-startup-ecosystem-ranking, (accessed 12 September 2017). Węcławski J. (1997), Venture capital. Nowy instrument finansowania przedsiębiorstw,Warszawa: PWN. Katarzyna Sieradzka, PhD, is a researcher and teacher at the Faculty of Economic and Legal Sciences at the University of Technology and Humanities in Radom. She specializes in issues related to development of the enterprises sector, including sources of financing, innovation, and competitiveness. She is the author of many articles, and author and co-author of several books.

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Josef Kašík

e-mail: [email protected] VŠB – Technical University of Ostrava, Faculty of Economics, Czech Republic

Correlation between corruption and GDP in European countries Abstract. The main goal of this paper is to test the hypothesis that corruption measured by the Corruption Perceptions Index is highly correlated with the gross domestic product per capita. The hypothesis is tested on the data of European countries in the period 2013–2017. The correlation analysis is used to test the hypothesis and the results are discussed. Keywords: corruption ; corruption perceptions index; correlation; GDP

Introduction Corruption is an old problem of mankind and some types of corruption are mentioned even in the Old Testament. We can read there “Do not pervert justice or show partiality. Do not accept a bribe, for a bribe blinds the eyes of the wise and twists the words of the innocent” (Deuteronomy 16:19) or “Do not accept a bribe, for a bribe blinds those who see and twists the words of the innocent” (Exodus 23:8). However, at the same time, it is a contemporary and global problem which has a significant impact on the whole of society including the business environment. Many studies and analyses of global organizations, anti-corruption strategies of governments and initiatives of businesses indicate that corruption is a compelling and contemporary socioeconomic problem. Despite realizing the importance and urgency of the problem, the perception of corruption in many countries of the world is worsening (Kašík, 2013). The main goal of this paper is to analyze the relationship between the perception of corruption and GDP per capita in European countries. The hypothesis is that there is a high level of correlation between the two variables.

238


1. Literature review The etymology of the word corruption (from Latin corruptus = spoiled, rotten, broken) can help us to explain the meaning of this word. It is evident and quite generally accepted that corruption is a negative phenomenon, which influences (breaks) the normal functioning of society and which we need to fight against. Nowadays, there are a lot of definitions of corruption in the documents of the international organizations but also in academic papers and articles. For example, Gould (1991: 468) defines corruption as a moral problem, i.e., corruption is “an immoral and unethical phenomenon that contains a set of moral aberrations from moral standards of society, causing loss of respect for and confidence in duly constituted authority”. However, viewing corruption merely as problems of morality and behavior tends to individualize a social phenomenon, i.e., it ignores the socio-political context of corruption (Seldadyo and Haan, 2006). To survive, corruption needs to be supported by discretionary power, economic rents, and a weak judicial system (Jain, 2001). Discretionary power means an authority to design and administer regulations, which is accompanied by the presence of economic rents. A weak judicial system refers to low probability of detection and penalty. Even in the absence of a moral problem, the combination of rent, power, and a weak judicial system is enough for corruption to exist (Seldadyo and Haan, 2006). Nye (1967: 419) defines corruption as “behaviour which deviates from the normal duties of a public role because of private-regarding (family, close private clique), pecuniary or status gains; or violates rules against the exercise of certain types of private-regarding influence. This includes such behaviour as bribery (use of reward to pervert the judgment of a person in a position of trust); nepotism (bestowal of patronage by reason of ascriptive relationship rather than merit); and misappropriation (illegal appropriation of public resources for private regarding uses).” Transparency International (2018) defines corruption as “the abuse of entrusted power for private gain.” Some studies (e.g. Mauro, 1997) show that corruption has a negative impact on business investment activity and GDP growth. Businessmen perceive corruption as an additional tax, which increases their costs. Moreover, it does not assure success of their project and therefore corruption decreases willingness to invest in countries with a high level of corruption. Similarly, the negative influence of corruption on foreign aid is observed because donors do not want to support waste and the inefficient using of money. Corruption is often accompanied by a significant reduction in collected taxes due to perceived ineffectiveness in using them and may raise the level of public expenditure which leads to adverse budgetary consequences. This fact is related to another negative consequence which is distortion of the composition of government

J. Kašík: Correlation between corruption and GDP in European countries

239

expenditures. In corrupted countries, government officials very often choose large projects on the basis of their potential to extort bribes regardless of their public welfare. Therefore, they support large and overpriced infrastructure projects rather than increasing the salaries of teachers. It is stated (Mauro, 1997) that corruption may lead to a lower quality of infrastructure and public services. The reason behind it may be insufficient control or the lack of interest to check the projects. Many studies have also searched for the empirical determinants of corruption. Possible causes of corruption mentioned in the literature (Mauro, 1997; Rose-Ackerman, 1999) are, for example: –– trade restrictions (e.g. quantitative restrictions on imports); –– government subsidies; –– price controls; –– multiple exchange rate systems; –– lower salaries paid to public sector workers; –– sociological factors – strong corruption climate in the society, quick enrichment cult, corruption ideal, significance of family relations (e.g. some societies with strong family relationships can tend towards a higher level of corruption activities), etc. Some other causes of corruption can be identified such as vague or complicated rules (norms, standards, legislation) in the country or organization. At the same time, it is quite a difficult task to identify all possible causes of corruption because it is often unclear what the cause is and what the consequence is (Kašík, 2013). Seldadyo and Haan (2006) identified four broad classes of underlying causes of corruption, namely (1) economic and economic institutions, (2) political, (3) judicial and bureaucratic, and (4) religious and geo-cultural factors. From economic determinants, income (mostly proxied by GDP per capita) is a commonly-used variable to explain corruption (e.g., Damania et al., 2004; Persson et al., 2003; van Rijckeghem and Weder, 1997). Although a country’s wealth is generally accepted as a significant predictor of corruption (Seldadyo and Haan, 2006), some authors, e.g., Kaufmann et al. (1999) and Hall and Jones (1999) question the causal relationship between corruption and income. Income distribution is another factor considered to influence corruption. Paldam (2002) claims that income disparity, proxied by Gini coefficient, significantly increases corruption. However, Park (2003) and Brown et al. (2005) found no evidence that greater income inequality increases corruption. The size of government can also be an important determinant of corruption. However, there is no consensus among authors on the theoretical

240


relationship between government size and corruption (Seldadyo and Haan, 2006). For example, whereas Fisman and Gatti (2002) and Bonaglia et al. (2001) draw the conclusion that government spending has a negative impact on corruption, Ali and Isse (2003) report a positive impact. Import share is another variable that, according to some authors, also affects corruption. Herzfeld and Weiss (2003) and Treisman (2000) find that a higher import share leads to less corruption. As far as political determinants are concerned, there is a consensus that democracy reduces corruption (Seldadyo and Haan, 2006). For example, freedom of the press is significantly correlated with corruption (Brunetti and Weder, 2003). Lederman et al. (2005), Park (2003), and Leite and Weidmann (1997) found out that corruption increases in unstable political systems. Some authors (Lederman et al., 2005; Ali and Isse, 2003; Fisman and Gatti, 2002) report that decentralized government lowers corruption. However, some others (Kunicova and Rose-Ackerman, 2005; Damania et al., 2004; Treisman, 2000; Brown et al., 2005; Goldsmith, 1999) argue that federalism increases corruption. The judicial system and the quality of bureaucracy are supposed to be crucial factors influencing corruption (Seldadyo and Haan, 2006). Herzfeld and Weiss (2003), Alt and Lassen (2003), Rauch and Evans (2000) and van Rijckeghem and Weder (1997) identified that an increase in wages lessens corruption. Gurgur and Shah (2005) report that the higher the quality of bureaucracy, the lower the probability for corruption to occur. Geographical, cultural and religious determinants are also mentioned in many studies as important in explaining the level of corruption. For example, ethno-linguistic homogeneity seems to reduce corruption (Lederman et al., 2005; La Porta et al., 1999). The same seems to be true for countries with many Protestants (Chang and Golden, 2007; Bonaglia et al., 2001; Treisman, 2000; La Porta et al., 1999).

2. Materials and methods In this paper, two main variables are used and analyzed: the perception of corruption and the gross domestic product (GDP) per capita. Questionnaires are usually used to measure the perception of corruption. These questionnaires can take the form of common public surveys or there is a possibility to use indexes of international organizations. The Corruption Perceptions Index (CPI) by the Transparency International organization is used in this paper. It is an index with a scale from 0 meaning the highest level of corruption perception

241


to 100 meaning the lowest level of corruption perception. The advantage of the CPI is a relatively long history of data collection and the trustworthiness of the organization Transparency International which provides the data. The data for period 2013–2017 were used for the analysis (Table 1). Table 1. Corruption Perception Index (CPI) for European countries from 2013–2017 Country

2013

2014

2015

2016

2017

Albania

31

33

36

39

38

Armenia

36

37

35

33

35

Austria

69

72

76

75

75

Azerbaijan

28

29

29

30

31

Belarus

29

31

32

40

44

Belgium

75

76

77

77

75

Bosnia and Herzegovina

42

39

38

39

38

Bulgaria

41

43

41

41

43

Croatia

48

48

51

49

49

Cyprus

63

63

61

55

57

Czech Republic

48

51

56

55

57

Denmark

91

92

91

90

88

Estonia

68

69

70

70

71

Finland

89

89

90

89

85

France

71

69

70

69

70

Georgia

49

52

52

57

56

Germany

78

79

81

81

81

Greece

40

43

46

44

48

Hungary

54

54

51

48

45

Iceland

78

79

79

78

77

Ireland

72

74

75

73

74

Italy

43

43

44

47

50

Kazakhstan

26

29

28

29

31

Latvia

53

55

55

57

58

Country

2013

2014

2015

2016

2017

Lithuania

57

58

61

59

59

Luxembourg

80

82

81

81

82

Macedonia

44

45

42

37

35

Malta

56

55

56

55

56

Moldova

35

35

33

30

31

242

Chapter 4. Financial, legal and IT aspects of management Country

2013

2014

2015

2016

2017

Montenegro

44

42

44

45

46

Netherlands

83

83

87

83

82

Norway

86

86

87

85

85

Poland

60

61

62

62

60

Portugal

62

63

63

62

63

Romania

43

43

46

48

48

Russia

28

27

29

29

29

Serbia

42

41

40

42

41

Slovakia

47

50

51

51

50

Slovenia

57

58

60

61

61

Spain

59

60

58

58

57

Sweden

89

87

89

88

84

Switzerland

85

86

86

86

85

Turkey

50

45

42

41

40

Ukraine

25

26

27

29

30

United Kingdom

76

78

81

81

82

Source: Transparency International, 2017.

In general, GDP measures the monetary value of final goods and services produced in a country in a given period of time – usually a year (Callen, 2017). GDP per capita is then the GDP divided by the average population of the country for the same year. Nominal GDP is used to determine the economic performance of a whole country or region and to make international comparisons. However, nominal GDP per capita does not reflect differences in the cost of living and the inflation rates of the countries. GDP per capita at purchasing power parity (PPP) is arguably more useful when comparing differences in living standards between different nations. Therefore, the data for GDP per capita at PPP provided by the International Monetary Fund during the period 2013–2017 were used in this paper (see Table 2). Table 2. GDP per capita at purchasing power parity (PPP) for European countries from 2013–2017 Country

2013

2014

2015

2016

2017

Albania

10 477

10 877

11 273

11 820

12 506

Armenia

7 761

8 170

8 513

8 643

9 456

Austria

45 934

46 778

47 327

48 013

49 868

Azerbaijan

17 277

17 824

17 915

17 378

17 492


243

Country

2013

2014

2015

2016

2017

Belarus

18 266

18 893

18 341

18 074

18 930

Belgium

42 168

43 338

44 200

45 124

46 553

Bosnia and Herzegovina

10 557

10 989

11 547

12 136

12 723

Bulgaria

17 627

18 292

19 288

20 453

21 686

Croatia

20 703

21 144

22 051

23 226

24 423

Cyprus

31 962

32 373

33 806

35 220

37 023

Czech Republic

29 096

30 433

32 317

33 529

35 512

Country

2013

2014

2015

2016

2017

Denmark

44 882

46 223

47 202

48 338

49 883

Estonia

26 508

27 856

28 685

29 684

31 749

Finland

40 490

40 771

41 114

42 408

44 332

France

39 912

40 801

41 507

42 366

43 760

Georgia

8 526

9 211

9 602

10 053

10 747

Germany

45 127

46 627

47 429

48 532

50 425

Greece

25 194

26 017

26 389

26 844

27 737

Hungary

24 006

25 553

26 757

27 770

29 473

Iceland

42 953

44 220

46 146

49 683

51 841

Ireland

47 422

52 133

65 656

69 248

75 538

Italy

34 804

35 310

36 025

36 877

38 140

Kazakhstan

23 645

24 734

24 940

25 167

26 252

Latvia

22 402

23 487

24 636

25 725

27 644

Lithuania

25 903

27 537

28 670

30 097

32 298

Luxembourg

94 823

99 738

101 255

103 286

106 373

Macedonia

12 754

13 432

14 087

14 664

14 914

Malta

32 246

34 921

37 884

39 510

41 944

Moldova

4 699

5 017

5 054

5 340

5 660

Montenegro

14 852

15 373

16 057

16 730

17 735

Netherlands

47 015

48 363

49 780

51 248

53 634

Norway

65 673

67 377

68 795

69 807

71 830

Poland

24 068

25 334

26 602

27 741

29 521

Portugal

26 359

27 218

28 130

29 042

30 416

Romania

18 859

19 855

20 949

22 369

24 508

Russia

26 440

27 072

26 658

26 930

27 834

Serbia

13 398

13 454

13 773

14 414

14 999

244


Country

2013

2014

2015

2016

2017

Slovakia

27 409

28 641

30 036

31 403

33 025

Slovenia

28 534

29 879

30 858

32 215

34 407

Spain

32 158

33 285

34 835

36 443

38 285

Sweden

44 906

46 410

48 518

49 995

51 474

Switzerland

57 098

58 808

59 423

60 365

61 421

Turkey

21 683

22 905

24 236

24 986

26 453

Ukraine

8 676

8 733

7 996

8 330

8 712

United Kingdom

39 154

40 762

41 838

42 838

44 117

Source: International Monetary Fund, 2018.

The research question is: How strongly are two variables, ie perception of corruption measured by the CPI and the GDP per capita, related? The correlation analysis by the means of the Pearson correlation coefficient was used to answer the question. The Pearson correlation coefficient determines the strength of the linear dependence between the observed variables (Dinu, 2015). The estimate of a correlation coefficient between two variables x and y is defined as the estimate of covariance x and y divided by the multiplication of estimates of their standard deviations, i.e. (Halásková and Halásková, 2014)

where cov xy is the covariance between x and y a can be calculated as the average of the multiplication of deviations, i.e. it is a measure of variability of two random variables x and y (Lynch, 2013):

The Pearson’s correlation coefficient has values ranging from , while the more the value approaches -1 or +1, the closer the correlation (direct linear correlation in the case of positive values, indirect in the case of negative ones). The more the correlation coefficient approaches zero, the weaker the correlation is. Thus, the correlation coefficients provide, on both sides, the dependence between x and y. The significance level for the study was set to 5%.


245

3. Results First of all, the correlation between the perception of corruption and the GDP per capita for the whole sample of European countries was done. The results of the correlation analysis using the Pearson correlation coefficient during the period 2013–2017 are presented in Table 3. Table 3. Development of correlation between perception of corruption and GDP per capita in European countries for the period 2013–2017 Pearson correlation coefficient

2013

2014

2015

2016

2017

0.785

0.790

0.791

0.791

0.805


The results in the table above indicate high correlation between the CPI and the GDP per capita. Moreover, the correlation is slightly increased during the period 2013–2017. The correlation is even higher when the ten best countries and ten worst European countries ranked by GDP per capita are analyzed. The results for the period 2013–2017 are presented in Table 4. Table 4. Development of correlation between perception of corruption and GDP per capita in 10 best and 10 worst European countries ranked by GDP for the period 2013–2017 Pearson correlation coefficient

2013

2014

2015

2016

2017

0.851

0.855

0.852

0.849

0.862


Because of the rather particular circumstances of Luxembourg which has extremely high GDP per capita (Peroni & Ferreira, 2012), this country was excluded from the next analysis. The results for 10 best (without Luxembourg) and 10 worst European countries are presented in Table 5. Table 5. Development of correlation between perception of corruption and GDP per capita in 10 best (without Luxembourg) and 10 worst European countries ranked by GDP for the period 2013–2017 Pearson correlation coefficient


2013

2014

2015

2016

2017

0.928

0.932

0.924

0.912

0.916

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When excluding Luxembourg, the correlation is even more obvious. Hence, all the results from the correlation analysis support the hypothesis that the CPI and GDP per capita are highly correlated variables.

Conclusions Corruption is one of the most compelling problems in our society. Based on empirical studies (Knack and Keefer, 1995; Mauro 1997; Thomas and Meagher, 2004), it was proved that corruption has a significant impact on the business environment, especially in the area of business investment activities, economic growth of countries, composition of government expenditures or foreign aid. At the same time, the exact exploration and analyses of corruption are rather complicated due to often hidden existence, indirect manifestation and not so clear relations from the point of causality (e.g. between level of corruption and poverty). The data and their analysis in this paper support the hypothesis that corruption measured by the CPI and country’s wealth measured by GDP per capita are two highly correlated variables. Simply, the countries with high values of the CPI index, i.e., with a low level of corruption, are the countries with high GDP per capita. The countries with low values of the CPI index, i.e., with a high level of corruption, are the countries with low GDP per capita. Of course, this conclusion does not imply a causal relationship, e.g., that a high level of corruption is a cause of a country’s poverty or vice versa. Based on some of the studies (Seldadyo and Haan, 2006), it seems that corruption and country’s wealth are both rather consequences of some other economic, political, geographical, cultural and religious factors. The underlying causes of corruption have to be looked at also in terms of disintegration, hypocrisy and moral relativism of individuals who often label corruption as an immorality, but whose private morals may be quite different. Acknowledgement This paper was supported within the Operational Programme Education for Competitiveness – Project No. CZ.1.07/2.3.00/20.0296.


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Knack, S., Keefer, P. (1995), Institutions and economic performance: cross country tests using Alternative Institutional Measures, Economics and Politics, 7(3): 207–227. Kunicova, J., Rose-Ackerman, S. (2005), Electoral rules and constitutional structures as constraints on corruption, British Journal of Political Science, 35 (4): 573–606. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., Vishny, R.W. (1999), The quality of government, Journal of Law, Economics, and Organization, 15: 222–279. Lederman, D., Loayza, N.V., Soares, R.R. (2005), Accountability and corruption: political institutions matter, Economics and Politics, 17: 1–35. Leite, C.A., Weidmann, J. (1999), Does mother nature corrupt?: natural resources, corruption, and economic growth, Working paper WP/99/85, International Monetary Fund, Washington, DC. Lynch, S.M. (2013), Using statistics in social research, New York: Springer. Mauro, P. (1997), Why worry about corruption? Economic Issues No. 6. Washington: International Monetary Fund. Nye, J.S. (1967), Corruption and political development: a cost-benefit analysis. American Political Science Review, 61: 417–427. Paldam, M. (2002), The Cross-country pattern of corruption: economics, culture and the seesaw dynamics, European Journal of Political Economy, 18: 215–240. Park, H. (2003), Determinants of corruption: a cross-national analysis, The Multinational Business Review, 11(2): 29–48. Peroni, C., Ferreira, I.S.G. (2012), Competition and innovation in Luxembourg, Journal of Industry, Competition and Trade, 12(1): 93–117. Persson, T., Tabellini, G., Trebbi, F. (2003), Electoral rules and corruption, Journal of the European Economic Association, 1(4): 958–989. Rauch, J., Evans, P. (2000), Bureaucratic structure and bureaucratic performance in less developed countries, Journal of Public Economics, 75: 49–71. Rose-Ackerman, S. (1999), Corruption and government: causes, consequences and reform, New York: Cambridge University Press. Seldadyo, H., Haan J. (2006), The determinants of corruption: a literature survey and new evidence, paper presented at the EPCS Conference, 20-23 April, Turku, Finland, available at: http://conferences.wcfia.harvard.edu/sites/projects.iq.harvard.edu/files/ gov2126/files/seldadyo_determinants_corruption.pdf, (accessed 28 May 2018). Thomas, M.A., Meagher, P.A. (2004), Corruption primer: an overview of concepts in the corruption literature, IRIS Discussion Paper No. 04/03, available at: http://www.iris.umd.edu, (accessed 21 May 2018). Transparency International (2017), Corruption perceptions index, available at: https://www.transparency.org/research/cpi/overview, (accessed 10 May 2018). Transparency International (2018), How do you define corruption, available at: https:// www.transparency.org/what-is-corruption#define, (accessed 28 May 2018). Treisman, D. (2000), The causes of corruption: a cross-national study, Journal of Public Economics, 76: 399–457.


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Van Rijckeghem, C., Weder, B. (1997), Corruption and the rate of temptation: do low wages in the civil service cause corruption?, IMF Working Paper WP/97/73. Josef Kašík is currently head of the Department of Business Administration at the Faculty of Economics, VŠB – Technical University of Ostrava in the Czech Republic. He graduated with PhD in Business Administration and Management at the same faculty in 2005. He has 15 years’ experience in consulting for businesses. His research interest includes business processes, business environment, business value and business diagnostics.

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Elvira Nica

e-mail: [email protected] The Bucharest University of Economic Studies, Faculty of Administration and Public Management, Bucharest, Romania

Jana Klieštiková


Mária Kováčová


Legislative challenges for insolvency management in V4 countries Abstract. The overwhelming majority of businesses is based on the idea that their lifetime will be unlimited and will bring continuous benefits to their owners in the form of profit, rising market value of their enterprise or growing or, at least, non-declining number of employees, etc. However, due to the entropy and turbulence of the economic and political environment in which companies are interacting, there may be a loss of key customers, change of the crucial macroeconomic fundamentals, reduction of expected returns, increase of costs or emergence of new, unexpected expenses. This paper is dedicated to the insolvency law de lege lata in the context of the application of a dual approach based on a special analysis of the so-called model legislation and legal regulations of V4 countries. From a methodological point of view, the paper is designed to be used as a coherent supportive decision-making mechanism for managers who do not have legal education. So, the aim of the paper is to identify relevant legislative challenges for insolvency management in V4 countries based on the cluster analysis of insolvency law frameworks for these countries in scope of the wider European context. Key words: insolvency; insolvency law; insolvency management; bankruptcy; bankruptcy law.

Introduction There could be a variety of situations in the life cycle of each business, some of which are connected with success and prosperity, others with crisis, failure and bankruptcy. It is clear that the objective of managing each business

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is to be in the first type of these situations; in fact, however, the second type also cannot be excluded because crisis and critical situations are the activators of every market economy (Nigam and Boughanmi, 2017; Pavlushina et al., 2017). During business growth, the company improves gradually and to some extent without major steps taken by management, in times of crisis radical and often unwelcome steps are necessary in order to re-establish financial health and gain business stability. The crisis can, therefore, create space for radical change, i.e. it is an analogy of natural selection in nature, when only strong individuals survive and adapt to new conditions and others may become extinct. Therefore, each enterprise should be at least theoretically ready for the last phase of its life cycle, i.e. for a situation where, for example, it will not be able to meet its obligations. Enterprises are complex organisms; they are not isolated but interact with other entities operating in the national economy, whether these are other businesses (suppliers and customers), non-financial or financial institutions, state administrative offices or customers as individuals and households. Failure, i.e., bankruptcy of the company will result in a chain reaction with negative consequences for all entities of the national economy. Moreover, the saying “Capitalism without bankruptcy is like Christianity without hell” also highlights the positive connotation of bankruptcy for the national economy as a whole. In the past, the corporate bankruptcy was missing in a V4 countries and it was replaced by political decisions when companies owned by state indicated financial problem. So, it was not the result of the elementary fundamental interactions of the market economy (Alaka et al., 2017; Kljucnikov et al., 2018). However, almost thirty years later, the situation has become diametrically different. The economies of V4 countries now function more or less on the basis of market principles of demand and supply; according to these principles, decisions are made about the distribution and the use of production resources and, ultimately, the determination of the price and quantity of goods and services. We can say that V4 countries as transition economies during their transformation, gradually developed a functioning state apparatus and created the environment that allows the development of market economy and business. It should be noted, at this point, that the degree of success of this transformation varies in different transition countries. Also, in no case can transition economies be understood as a homogeneous and compact group. The path of each specific country to market economy was determined, on the one hand, by different socio-cultural and political conditions inherited from the past and, on the other hand, by different ways of understanding transformation as a concept by the political elites of each of the transition countries (Pittiglio et al., 2016; Yang, 2017; Jaksic, 2018).

E. Nica, J. Klieštiková, M. Kováčová: Legislative challenges for insolvency management...

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1. Theoretical background & literature review According to the explanatory memorandum to Act no. 7/2005 Coll. on bankruptcy and restructuring (http://old.justice.sk/, 2018), it is possible to divide the individual legal orders of the world according to their approach to bankruptcy into three categories, namely pro-debtor, pro-creditor and combined legal orders. The pro-debt character strengthening the position of the borrower undergoing bankruptcy is currently in countries such as France, Spain, Portugal, Greece and Belgium. This category also includes most Latin American countries. In contrast, the pro-creditor nature of the legal regulation is currently being applied mainly in the UK and in countries close to Anglo-American legal culture. This character of legislation is also characteristic of Germany, the Netherlands, Sweden and Japan. It is meant to support the optimal development of the business environment as it enables creditors to effectively protect themselves from the consequences of the debtor’s bankruptcy, and by its predictability and increased legal certainty stimulates the overall circulation of capital. The compromise in the form of a balanced position of creditors and debtors is presented in legal regulation of the USA and Austria (Powers et al., 2017). Over the past five years, the Doing Business organization that has been evaluating the state and the effectiveness of business-legal regulations, reported more than 180 bankruptcy law reforms in 111 countries around the world (http://www.doingbusiness.org/, 2018), Despite the fact that individual reforms implemented under bankruptcy law had different objectives and were influenced by various factors stemming from the social and political specificities of the countries that adopted them, these reforms can be divided into two groups, namely fundamental and evolutionary types of reforms (Grynchyshyn, 2016). Fundamental reforms are, according to this division, those that de facto create a new concept of bankruptcy law. Until the adoption of such reforms, the bankruptcy of the debtor and its resolution have been regulated inconsistently and unsystematically in the national legal order. This type of character was present for as much as one-third of the recorded reforms, among which are representative reforms that took place in the Democratic Republic of Congo and the Republic of Djibouti (http://www. doingbusiness.org/, 2018) These are the reforms from 2013, which are based on the uniform law adopted in 1998 by the member states of the Organization for harmonization of business law in Africa. The Democratic Republic of Congo has adopted a separate law dealing with bankruptcy, the Republic of Djibouti has incorporated the provisions of the uniform law on the collective management of debt clearing into the newly adopted commercial code (Bussoli and Marino, 2018).

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Evolutionary reforms mean reforms within those legal orders that already contain a comprehensive regulation for the debtor’s bankruptcy resolution. These reforms are being implemented to improve it in order to achieve greater legal certainty for the subjects of law, an improved state of enforceability mainly in order to adapt the law to the dynamics of the development of national economy and market mechanisms. According to the Doing Business organization, two-thirds of the reforms that took place in the past ten years had such a character (http://www.doingbusiness.org/, 2018) These reforms were mainly focused on the creation of a specialized system of so called insolvency courts, the adoption of measures aimed at speeding up insolvency proceedings, simplifying the conduct of business during restructuring and adjusting the positioning and the performance of the administrator function. Doing Business is also concerned about the level of satisfaction of receivables during bankruptcy proceedings. Based on its findings, it subsequently evaluates the effectiveness of legal regulations addressing the issue of bankruptcy. Countries with effective bankruptcy law are considered to be those where the total value of satisfied claims is maximized at the lowest administrative costs. Such countries include, for example, the so-called high-income OECD economies where the average receipt per one dollar is sixty-six cents (including the Slovak Republic as a member of the European Union). In contrast, countries with ineffective bankruptcy law are characterized by more expensive bankruptcy proceedings and a lower rate of satisfaction of receivables. Such economies are found, for example, in sub-Saharan Africa, where the average rate of satisfaction of receivables is twenty cents per dollar, and in Latin America and the Caribbean, where per one dollar of receivables only the amount of thirty-one cents is satisfied. The effectiveness of bankruptcy law is also quantified by the so-called legal regulations quality index, which is determined annually on the basis of the World Bank’s internal methodology (Deakin et al., 2017). The output is the list of countries ranked according to the value of the index. The countries with the most effective adjustment of bankruptcy law are assigned 16 points and the countries with the least effective legislation are assigned 0 points. The highest score points (15) are reached by the US, Germany, Puerto Rico, Macedonia, Kazakhstan and Bosnia and Herzegovina. However, the effectiveness of the legislation itself is supplemented by an indicator of the rate of claims recoverability, length of proceedings and their cost. When such an approach is applied, the order of the best bankruptcy regulation laws is as follows: 1) Japan; 2) Finland; 3) USA; 4) Germany; 5) Korea; 6) Norway; 7) Denmark; 8) The Netherlands; 9) Puerto Rico; 10) Slovenia. Slovenia, after taking these criteria into account, possesses not only the most effective


255

bankruptcy law worldwide but also has the highest quality bankruptcy law among the so-called transition countries. The ranking of these countries is among the 168 rated countries of the world as follows: 1) Poland (22); 2) the Czech Republic (25); 3) the Slovak Republic (42); 4) Hungary (62).1 The quality of insolvency law of these countries has a substantial impact on the development of this issue in terms of the scope of their legislation and socio-political development (not only in the legal sense but also in the context of wider economic implications). Table 1. Indicators for resolving insolvency in selected countries (2018) Indicator Recovery rate (cents on the USD)

Time (years)

Cost (% of estate)

Outcome (0 as piecemeal sale and 1 as going concern)

Strength of insolvency framework index (0-16)

Czech Republic

67.0

2.1

17.0

1

13.0

Hungary

43.7

2.0

14.5

0

10.0

OECD (HI EU)

71.2

1.7

9.1

-

12.1

Poland

63.1

3.0

15.0

1

14.0

Slovak Republic

47.3

4.0

18.0

1

13.0

Country

Source: own processing according to http://www.doingbusiness.org/

2. Methods Clustering techniques have been applied to a wide variety of research problems. Tatarczak and Boichuk (2018) provide an excellent summary of the many published studies reporting the results of cluster analyses. His work established usage of cluster analysis across wide group of scientific disciplines, not only in the typical quantitative scientific disciplines but also in qualitative ones. Cluster analysis is an exploratory data analysis tool which aims to sort different objects (EU member OECD high income countries bankruptcy law frameworks) into groups in a way that the degree of association between two objects is maximal if they belong to the same group and minimal otherwise. When applying this analysis, it is quite challenging not only to draw up, appropriately, a basic set of used object characteristics but also to interpret obtained Individual countries are ranked according to the quality of bankruptcy law within the category of the V4 countries. 1

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results adequately because cluster analysis simply discovers structures in data without explaining why they exist. For amalgamation, we used Ward’s method because it uses an analysis of variance approach to evaluate the distances between clusters. Each EU member OECD high income country is described by these thirteen variables: 1) recovery rate (cents on the US dollar); 2) time (years); 3) cost (% of estate); 4) outcome (0 as piecemeal sale and 1 as going concern); 5) strength of bankruptcy framework index (0-16); 6) commencement of proceedings index (0-3); 7) management of debtor’s assets index (06); 8) reorganization proceedings index (0-3); 9) creditor participation index (0-4); 10) GDP per capita (US dollar); 11) GDP 2017 vs. 2016 (%); 12) unemployment (%); 13) quality of business environment (score). These variables are internally divided into two groups which, in general, describe bankruptcy law (recovery rate, time, cost, outcome, strength of bankruptcy framework index, commencement of proceedings index, management of debtor’s assets index, reorganization proceedings index and creditor participation index) and which describe dynamics of economy (GDP per capita, GDP 2017 vs. 2016, unemployment, quality of business environment). Figure 1 shows the process of cluster creation and, where it is visible, the speed of clustering among EU member states.


Figure 1. Process of cluster creation Number of clusters 0

5

10

15

Luxembourg: 20 Malta: 21 Cyprus: 19 Spain: 26 Slovak Republic: 27 Portugal: 25 Italy: 23 Poland: 24 Czech Republic: 22 Lithuania: 17 Hungry: 15 Slovenia: 18 Latvia: 16

Case

France: 14 Greece: 13 Romania: 26 Croa�a: 11 Estonia: 12 Bulgaria: 10 Germany: 5 Finland: 4 Ireland: 6 United Kingdom: 9 Sweden: 8 Denmark: 3 Netherlands: 7 Belgium: 2 Austria: 1

Source: own processing using IBM SPSS software.

20

25

30

257

258


3. Results and discussion As is visible in Figure 2, we found out these five clusters by analysing OECD high income EU member states in terms of the scope of mentioned variables: –– I. cluster: Belgium, Netherlands, Austria, Denmark, Sweden, United Kingdom, Ireland, Finland, Germany –– II. cluster: Bulgaria, Estonia, Croatia, Romania, Greece –– III. cluster: Cyprus, Malta, Luxembourg –– IV. cluster: Czech Republic, Poland, Italy, Portugal, Slovak Republic, Spain –– V. cluster: Hungary, Lithuania, Latvia, Slovenia, France Figure 2. Dendrogram using Ward linkage Belgium Netherlands Austria Denmark Sweden United Kingdom Irelabd Finland Germany Cyprus Malta Luxembourg Czech Republic Poland Italy Portugal Slovak Republic Spain Hunagry Lithuania Latvia Slovenia France Bulgaria Estonia Croa�a Romania Greece

2 7 1 3 8 9 6 4 5 19 21 20 22 24 23 25 27 28 15 17 16 18 14 10 12 21 26 13

Source: own processing using IBM SPSS software.


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As is shown above, there is no equal situation in all V4 countries. Three of them (Slovak Republic, Czech Republic and Poland) are clustered in cluster no. IV while Hungary is clustered in cluster no. V (together with Lithuania, Latvia, Slovenia, France). Both clusters are quite heterogeneous from the socio-political and legislative point of view. This situation provides a platform for analysis of relevant aspects of insolvency legislation frameworks in V4 countries. Tables 2–5 subsequently provide an overview of the essential aspects of each legal arrangement of V4 countries, with an emphasis on the concept of insolvency, the position of the debtor and the position of the creditor.2 Table 2. Resolving insolvency in the Czech Republic – measure of quality Question

Answer

Score

Strength of insolvency framework index (0–16)

13

Commencement of proceedings index (0–3)

2.5

What procedures are available to a DEBTOR when commencing insolvency proceedings?

Debtor may file for both liquidation and reorganization

1

Does the insolvency framework allow a CREDITOR to file for insolvency of the debtor?

Yes, but a creditor may file for liquidation only

0.5

What basis for commencement of the insolvency proceedings is allowed under the insolvency framework?

Both options are available, but only one of them needs to be complied with

1

Management of debtor’s assets index (0–6)

5.5

Does the insolvency framework allow the continuation of contracts supplying essential goods and services to the debtor?

Yes

1

Does the insolvency framework allow the rejection by the debtor of overly burdensome contracts?

Yes

1

Does the insolvency framework allow avoidance of preferential transactions?

Yes

1

Does the insolvency framework allow avoidance of undervalued transactions?

Yes

1

2 In the tables, we would like to draw attention to the possible interpretive noise based on the fact that the total score does not correspond to the sum of the partial scores in the individually assessed areas as it follows from the Doing Business methodology. The reason is that in the text of the publication we do not consider restructuring as a possible way of solving bankruptcy but the value of its score represents the difference between the aggregate value of the index score and the partial values given in the tables. The reason is that the restructuring does not have a liquidation character for the company.

260

Chapter 4. Financial, legal and IT aspects of management Question

Answer

Score

Does the insolvency framework provide for the possibility of the debtor obtaining credit after commencement of insolvency proceedings?

Yes

1

Does the insolvency framework assign priority to post-commencement credit?

Yes, over all pre-commencement creditors, secured or unsecured

0.5

Creditor participation index (0–4)

2

Does the insolvency framework require approval by the creditors for selection or appointment of the insolvency representative?

Yes

1

Does the insolvency framework require approval by the creditors for sale of substantial assets of the debtor?

No

0

Does the insolvency framework provide that a creditor has the right to request information from the insolvency representative?

No

0

Does the insolvency framework provide that a creditor has the right to object to decisions accepting or rejecting creditors’ claims?

Yes

1

Source: own processing according to http://www.doingbusiness.org/ Table 3. Resolving insolvency in Hungary – measure of quality Question

Answer

Score


10


2.5



1


Yes, but a creditor may file for liquidation only

0.5



1


5


Yes

1


Yes

1


261

Question

Answer

Score


Yes

1


Yes

1


Yes

1


No priority is assigned to post-commencement creditors

0


2


Yes

1


No

0


No

0


Yes

1

Source: own processing according to http://www.doingbusiness.org/ Table 4. Resolving insolvency in Poland – measure of quality Question

Answer

Score


14


3



1


Yes, a creditor may file for both liquidation and reorganization

1



1


6

262

Chapter 4. Financial, legal and IT aspects of management Question

Answer

Score


Yes

1


Yes

1


Yes

1


Yes

1


Yes

1


Yes, but only over ordinary unsecured creditors

1


2


No

0


Yes

1


No

0


Yes

1

Source: own processing according to http://www.doingbusiness.org/ Table 5. Resolving insolvency in Slovakia – measure of quality Question

Answer

Score


13


3



1


Yes, a creditor may file for both options

1


263

Question

Answer

Score



1


4


Yes

1


Yes

1


Yes

1


Yes

1


No

0


No priority is assigned to post-commencement creditors

0


3


Yes

1


Yes

1


No

0


Yes

1

Source: own processing according to http://www.doingbusiness.org/

Hungarian insolvency law is characterized by relevant divergence in the scope of V4 countries insolvency law analysis (clustering out of other V4 countries, low level of insolvency law quality in comparison with other V4 countries). The basic national sources of bankruptcy law in Hungary are, according to research conducted by BNT company focused on insolvency law in Central and Eastern Europe and an analysis of its current state (http://www. bnt.eu/, 2018): –– Act no. 49/1991 on bankruptcy and insolvency proceedings and on

264


amendments and supplements to certain laws, as amended –– Act no. 4/2006 on commercial companies and on the amendment of some laws, as amended –– Government Regulation no. 114/2006 on the register of administrators Hungarian law recognizes two ways of dealing with bankruptcy. It is similar to other world legal orders for bankruptcy (liquidation court proceedings) and restructuring (judicial proceedings aimed at preserving the business in bankruptcy). Hungarian law recognizes two ways of dealing with bankruptcy. It is similar to other legal orders for bankruptcy (liquidation court proceedings) and restructuring (judicial proceedings aimed at preserving the business in bankruptcy). The debtor, the creditor or the liquidator are the legally authorized entities for filing an application for the opening of insolvency proceedings. Failure to comply with the obligation to file a motion may lead to the personal liability of a member of the statutory body of a company. Criminal liability for late submission of a petition is excluded under Hungarian law. Under certain conditions, however, the court is also required to start proceedings if the previous restructuring has been unsuccessful; this is the registry court or the court that is hearing the criminal proceedings against the debtor. The application for the opening of proceedings shall be lodged with the court competent according to the address of the debtor. There is no national register in Hungary to summarize ongoing insolvency proceedings. The beginning of proceedings is published in the Business Journal (Cégközlöny), which is available in only Hungarian, and the addendum attached to the business name of the company also indicates the ongoing insolvency proceedings. The Act exhaustively sets out these facts as the basis for the filing of a bankruptcy petition (it is irrelevant whether, from the economic point of view, the debtor is in fact insolvent): –– the restructuring was unsuccessful (the borrower did not meet its obligations under the restructuring plan); –– the enterprise is unable to meet the requirements of the registry court; –– the company did not pay the penalty imposed in the criminal proceedings; –– the company did not pay outstanding claims of its creditors in excess of 200 000 HUF without interest, which is approximately 665EUR.


265

The court decides on the commencement of the bankruptcy within 60 days of submission. The bankruptcy is commenced on the day of publication of the court decision on the debtor´s bankruptcy in the Business Journal. Subsequently, the administrator is appointed, all the obligations of the bankrupt become payable and an inventory of assets is made, which are subsequently monetized. Creditors file their claims within 40 days of such disclosure. If the creditor fails to meet this time limit, he may file his claim within an additional period of 180 days from the date of bankruptcy. However, in this case, his claim will be satisfied only if the claims filed in the normal 40-day period have been satisfied and the balance of the asset monetization is not zero. However, if the creditor misses this additional 180-day period, he/she is not entitled to satisfy his/her claims even if the funds are available. Entry of the claim into the bankruptcy proceedings is subject to the payment of a fee of 1% of the amount of the claim filed, at a minimum of 5,000 HUF (approximately 18 EUR) and a maximum of 200,000 HUF (approximately 700EUR). Secured receivables are satisfied by the monetization of assets that have secured the receivable. Receivables of unsecured creditors are divided into groups in which they are subsequently satisfied. According to above-mentioned information, we can state that practice of Hungarian insolvency law doesn´t reflect quality trends in wider market space (not even V4 but also OECD high income European countries). This situation can be considered as a possible barrier in development of Hungarian cross-border economic relations among traditionally cooperating post-soviet countries (Czech Republic, Hungary, Poland, Slovak Republic). Moreover, it has various significant negative impacts on managerial practice because the competitive position of Hungary (weakened by the absence of the euro) is even lower in comparison with other V4 countries. These negative impacts consist mainly of lower market dynamics caused by rigid insolvency procedure and of possible loss of direct foreign investments. In order to avoid this, managers should intensify their pressure and try to have constructive dialogue with lawmakers.

Conclusions The aim of this paper has been to identify relevant legislative challenges for insolvency management in V4 countries based on the cluster analy-

266


sis of insolvency law frameworks of these countries in the scope of a wider European context. We applied cluster analysis to verify 1) coherence in V4 insolvency law legislation supposed because of common characteristics of these economies which results from their common socio-political evolution in the past and to 2) verify fellowship of V4 insolvency law frameworks in the wider European context. We found out that V4 countries are a relevant component of European insolvency law space (by its clustering together with traditional market economies) but on the other hand, we detected significant internal divergence in the scope of their insolvency legislations. So, from the point of view of insolvency law similarities, Hungary should be excluded from V4 countries. The reason is that the quality of insolvency law is lower than the quality of insolvency law in the Czech Republic, Poland and the Slovak Republic. The key features of Hungarian insolvency law regulation have been described in the presented paper as well. So, we can conclude that internal heterogeneity among the insolvency law frameworks of V4 countries is significant to the detriment of Hungary such that 1) Hungary should revise its insolvency law to arrange sustainable development of the national economy in the scope of wider not only V4 but also European market space and 2) managers operating on the Hungarian market should be aware of possible negative impacts of this situation on their foreign and international market activities. Thus, the pressure to harmonise legislation in the scope of wider insolvency law context, should be made from the bottom to ensure that Hungary will remain a trustworthy business partner. Acknowledgement The research leading to these results has received funding from project entitled “Creation of new paradigms of financial management at threshold of the 21st century in conditions of the Slovak Republic” in frame of the programme of the Slovak Scientific Grant Agency under grant agreement number VEGA 1/0428/17.

the the the the

References Act no. 49/1991 Coll. on bankruptcy and insolvency proceedings and on amendments and supplements to certain laws. Act no. 4/2006 Coll. on commercial companies and on the amendment of some laws. Act no. 7/2005 Coll. on bankruptcy and restructuring. Alaka, H.A., Oyedele, L.O., Owolabi, H.A., Oyedele, A.A., Akinade, O.O., Bilal, M., Ajayi, S.O. (2017), Critical factors for insolvency prediction: towards


267

a theoretical model for the construction industry, International Journal of Construction Management, 17(1): 25–49. BNT (2018), Research focused on insolvency law in Central and Eastern Europe and an analysis of its current state – Hungarian insolvency law, available at http://www.bnt.eu/, (accessed 19 June 2018). Bussoli, C., Marino, F. (2018), Trade credit in times of crisis: evidence from European SMEs, Journal of Small Business and Enterprise Development, 25(2): 277–293. Deakin, S., Mollica, V., Sarkar, P. (2017), Varieties of creditor protection: Insolvency law reform and credit expansion in developed market economies, Socio-Economic Review, 15(2): 359–384. Doingbusiness (2018), Reforms of insolvency law and its characteristics among OECD HI countries, available at http://doingbusiness.org/, (accessed 24 July 2018). Government Regulation no. 114/2006 Coll. on the register of administrators. Grynchyshyn, Y. (2016), Evolution of European approach to using financial restructuring in the system of crisis management of enterprises, Economic Annals-XXI, 156 (1–2): 63–66. Jaksic, T. (2018), Strong letters of comfort – Legal nature of the contract, content and breach of the contractual obligation, insolvency and emergency management proceedings, Zbornik Pravnog Fakulteta Sveucilista u Rijeci, 39(2): 773–807. Kljucnikov, A., Sobekova-Majkova, M., Vincurova, Z., Sarvutyte-Gailiuniene, M., Kiausiene, I. (2018), The insolvency of SMEs within the perspective of the central European region, Transformations in Business & Economics, 17(2): 210–224. Ministry of justice of Slovak Republic (2005), Explanatory memorandum to Act no. 7/2005 Coll. on bankruptcy and restructuring, available at http://old.justice.sk/, (accessed 19 July 2018). Nigam, N., Boughanmi, A. (2017), Can innovative reforms and practices efficiently resolve financial distress? Journal of Cleaner Production, 140:1860–1871. Pavlushina, A., Anaeva, E.A., Levchenko, L.V., Loshkarev, A.V., Nikiforova, V.M. (2017), Economic expedience of certain procedures of insolvency institute (bankruptcy): statistical and legal aspect, Russia and the European Union: development and perspectives, New York: Springer Verlag. Pittiglio, R., Reganati, F., Tedeschi, C. (2016), To what extent do differences in legal systems affect cross-border insolvency? Evidence from foreign-owned Italian firms, dead firms: causes and effects of cross-border corporate insolvency, Bingley: Emerald Group Publishing. Powers, L., Breen, G., Harris, J. (2017), Insolvency law and management, Journal of Banking and Finance Law and Practice, 28(4): 337–342. Tatarczak, A., Boichuk, O. (2018), The multivariate techniques in evaluation of unemployment analysis of Polish regions, Oeconomia Copernicana, 9(3): 361–380. Yang, Ch.-G., Trimi, S., Lee, S.-G., Yang, J.-S. (2017), A survival analysis of business insolvency in ICT and automobile industries, International Journal of Information Technology & Decision Making, 16(6): 1523–1548.

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Elvira Nica is a Professor at the Bucharest University of Economic Studies, Dean of the Faculty of Administration and Public Management, Director, Center for Human Resources and Labor Studies, American Association for Economic Research (New York), and Senior Research Fellow at the Cognitive Labor Institute, New York City. She is a section editor for Springer (EEPAT). Jana Klieštiková is an Associate Professor at the Department of Economics, University of Zilina. Her professional and research activities are focused mainly on the issue of bankruptcy law, management of intellectual property, brand management and corporate social responsibility. She has more than 30 records in the databases for WoS and SCOPUS with more than 75 citations. Her current h-index value is 6. Mária Kováčová is a lecturer at the Department of Economics, University of Zilina. Her professional and research activities are focused mainly on the issue of bankruptcy failure modelling, econometrics, financial health of companies and financial management. She has more than 40 records in the databases for WoS and SCOPUS with more than 110 citations. Her current h-index value is 8.

269

Olaniyi Evans

e-mail: [email protected] School of Management & Social Sciences, Pan-Atlantic University, Lagos, Nigeria

Digital government: ICT and public sector management in Africa Abstract. This study examines the effect of information and communication technologies (ICT) on public sector management in Africa for the period 1995–2015 using panel GMM model and Toda-Yamamoto causality tests. The empirical evidence shows that ICT has a positive and statistically significant effect on public sector management, meaning that an increase in ICT is associated with improved public sector management. There is also a bi-directional causality between ICT and public sector management, suggesting that ICT spurs public sector management which, in turn, spurs ICT even further. The public sector, civil society and international actors therefore have the responsibility to collaborate on developing policies and applications that will maximize the potential of digital government for every level of the public sector in Africa. Key words: digital government; ICT; public sector management; public value; e-government

Introduction What is the effect of information and communication technologies (ICT) on public sector management? The issue of the effect of ICT on public sector management has, over the years, sparked controversies among scholars, policymakers and the media based on varying findings (e.g., Liu and Yuan, 2015; Gil-García et al., 2018). A strand of the literature has suggested that ICT has positive effects on public sector management (e.g. Scupola and Zanfei, 2016; Mimbi and Bankole, 2016). This is buttressed by Figures 1 and 2 which show the correlation of internet usage and mobile penetration with government spending in some selected African countries. Countries with higher internet usage and mobile penetration also have higher government spending

270


(e.g., Algeria, Mauritius, Morocco, South Africa and Tunisia). Digital government is considered “an essential aspect of innovation, co-production, transparency, and the generation of public value” (Gil-García et al., 2018: 1). However, studies that attempt to understand the role that digital government plays in public management theory and practice are scarce. Moreover, the few studies in the literature are in advanced economies, with little empirical attention to Africa. This study fills the gap. Figure 1. Internet usage and government spending (2015) General government final con�ump�on expenditure (% of GDP)

30 Zimbabwe

25

Algeria

20 Zambia

Liberia

15

Ghana

Marocco Mauri�u�

Tanzania

10

Egypt

Kenya

Angola

South Africa

Ethiopia

5 0

0

10

20

30

40

50

60

70

Source: World Bank, 2017.

General government final consump�on expenditure (% of GDP)

Figure 2. Mobile penetration and government spending (2015) 30 Zimbabwe

25

Algeria

20 Zambia

15

Marocco Liberia

Senegal

Angola Tanzania

10

South Africa Ghana Mauri�us

Kenya

Egypt

Ethiopia

5 0

0

20

Source: World Bank, 2017.

40 60 80 100 120 Individuals using the Internet (% of popula�on)

140

160

O. Evans: Digital government: ICT and public sector management in Africa

271

This study deals with a contemporary issue and is of special relevance to Africa, corresponding with a period when almost all governments in African countries have ongoing ICT projects aiming at efficiency of administration and improvement of public sector services (Amegavi et al., 2018; Evans, 2018a; Evans, 2018b; Hwabamungu et al., 2018; Karanja, Sang and Ndirangu, 2018). In many developed countries, within a short period, digital government has evolved rapidly from basic uses of ICT as simple tools to facilitate highly structured administrative work to the integration of ICT throughout government operations. The increasing use of Web 2.0, social media, and mobile and wireless ICT by citizens has greatly influenced the way public services are provided and how citizen engagement processes are delivered (Liu and Yuan, 2015: 140). However, African countries are lagging behind in digital government adoption compared with developed countries. For African countries to successfully adopt ICT, systematic analyses need to be carried out to understand the effect of ICT on public administration. Only when this relationship is clearly understood can innovative ICT be impeccably integrated into African governance structure. Hence, the objective of this paper is to empirically analyze the effect of ICT on public sector management in Africa using the general method of moments (GMM) and Toda-Yamamoto causality approach. The study should be of interest to both researchers and policymakers interested in government information technology implementation, in general, and digital government, in particular. The rest of the paper is organized as follows: Section 2 presents the theory and review of literature, while Section 3 deals with the data and methodology. Section 4 provides the empirical results while Section 5 discusses the results. Section 6 concludes with policy recommendations.

1. Theory and literature review Among the theories of information technology, the Technology Acceptance Model (TAM) is one of the most widely used models to describe consumer acceptance of information technology (Adeola and Evans, 2018). TAM has, in recent years, been adapted to study various factors affecting consumers’ behavior in the context of health information technology (e.g., Briz-Ponce and García-Peñalvo, 2015; Gao, Li and Luo, 2015; Chen and Lin, 2018; Razmak and Bélanger, 2018). TAM has been constantly and variously expanded, and each of these expansions has been driven by the need to predict the use of new information technology (Venkatesh and Bala, 2008;

272


Kim and Park, 2012). Combining cultural trends and social context as the key factors, TAM centers on what attributes of a particular technology drive consumers’ acceptance of the technology. Therefore, TAM is a useful model for “developing strategies to increase the acceptance of information technology, as it provides a direct relationship between acceptance of the technology, and the technology’s perceived usability and ease of use” (Kim and Park, 2012: 2). An increasing number of studies in the literature have therefore applied TAM to study public sector management or digital government (e.g., Carter and Bélanger, 2005; Lin et al., 2011). For example, Carter and Bélanger (2005) integrate constructs from TAM, Diffusions of Innovation theory and web trust models to study factors that influence citizens’ adoption of e‐government initiatives. Their findings showed that perceived ease of use, compatibility and trustworthiness are significant predictors of citizens’ intention to use a digital government service. Lin et al. (2011) showed how TAM and digital government initiatives positively affect the Gambian government, in spite of the cultural differences within the country. Their study showed that the core constructs of the TAM have strong effects on user-intention towards digital government products. These findings suggest that TAM can be effectively integrated with other theoretical approaches to understand the acceptance of digital government better. Digital government is the use of electronic communications devices such as computers and the internet to provide public services (Pardo, 2000; Fang, 2002; West, 2005). It refers to the digital interactions of government and between government and the public using a range of ICT. Through the use of ICT as a tool to achieve better governance, digital government encourages citizen engagement and participation in governance (Thomas and Streib, 2003; Chun et al. 2010, Hovy, 2010). Digital government is also referred to as e-government, online government, and internet-based government (Rosenberg, 2018; Wirtz and Daiser, 2018). Through digital government, the government encourage the setting up of websites where citizens can find government information (e.g., regulatory services, public hearing schedules, and issue briefs); two-way communications (between the government and the citizen, a business, or another government agency); transactions (e.g., lodging tax returns, applying for services and grants); and governance (Al-Hujran et al., 2015; Nica and Potcovaru, 2015; Rana and Dwivedi, 2015; Carter et al., 2016). ICT adoption in public sector management has often been associated with reform programs aimed at reducing inefficiencies generated by bureaucracy (Clegg, 2007). Generally, investments in public sector information systems by governments are associated with organizational transformations


273

aimed at enhancing efficiency and policy effectiveness (Gil-Garcia and Pardo, 2005; Kamarck, 2007). In this context, ICT in public sector is deployed to enhance organizational efficiency and effectiveness and therefore reduce bureaucracy. ICT is used to coordinate the execution of activities, and hence to deliver public services, with reliance on ICT to increase procedural efficiency. ICT is used to facilitate and support the basic functions of coordination and control of public organizations; functions defined in “the legal-normative set of rules designed to standardize the administrative procedure and the delivery of public services” (Cordella and Tempini, 2015 p. 3). The issue of the effects of ICT on public sector management has, over the years, sparked controversies among researchers based on varying findings (e.g. Pang et al., 2014; Scupola and Zanfei, 2016; Strielkowski et al., 2017). For example, Strielkowski et al. (2017) applied the multidisciplinary cross-country comparison of Estonia, India and the United Kingdom, analysing the depth of use and the functionality of ICT in the public sector. Their results showed that, if properly implemented and managed, novel ICT might represent a breakthrough in traditional state and municipal management. Scupola and Zanfei (2016) examined the co-evolution of public governance and innovation. Their theoretical and empirical analysis showed that “the transition from a new public management approach towards a networked governance mode implies a greater distribution of knowledge and innovation across different organisational levels within public administrations” (Scupola and Zanfei, 2016: 237). Bannister and Connolly (2014) examined the relationship between ICT, transformative government and such public values. A study of the literature on public values is used to develop a typology of public sector values likely to be affected by ICT. They argued that ICT can and does have transformational impacts on public values, though not always for the better. In a review of public-value management literature, Pang et al. (2014: 187) argued that the following five organizational capabilities mediate the relationship between IT resources and public value: “public service delivery capability, public engagement capability, co-production capability, resource-building capability, and public-sector innovation capability”. They argued that IT resources in public organizations can help public managers to improve public-value frontiers by nurturing these five organizational capabilities to reduce conflicts among competing values. Criado et al. (2017) examined the factors that make social media successful in Spanish local governments. They showed a direct relationship between organizational, institutional, and environmental factors with the successful use of social media in local public administrations. In a meta-analysis, Karkin et al. (2018: 20) found that ICT-related innovation can promote public values

274


“mainly through transforming the relationship between government and citizens, improving democratic outcomes such as transparency and public participation, assisting in meeting collective expectations of the public, and enabling knowledge exchange and collaboration across different organizations”. There is a substantial literature on e-government that discusses ICT as a tool for reducing bureaucracy in government organizations. Some studies have provided a complementary argument, which favored the use of ICT in the public sector to support the operations of bureaucratic organizations. For example, building on the case of the Municipality of Venice, Cordella and Tempini (2015) argued that digital government projects can deliver better services by introducing a new inter-organizational layer of bureaucratic coordination. In other words, ICT can be used to support rather than jettison bureaucracy. Using the concepts of e-bureaucracy and functional simplification and closure, the authors proposed evidence and support for the argument that bureaucracy should be preserved and improved where e-government policies are concerned. A strand of the literature has emanated from Africa (e.g., Mimbi and Bankole, 2016; Munthali et al., 2018; Evans, 2019). Mimbi and Bankole (2016) examined ICT and public service value creation in Africa. The authors showed that ICT has efficiently transformed public values in Africa. More compelling, they showed that the efficiency of ICT in transforming public values for more than three-quarters of African countries was below fifty percent. Hackney and Tassabehji (2017) found that time and cost benefits are important drivers for an individual’s decision to opt for accessing public services online and that citizens are willing to pay a fee to be able to access these services through ICT. Evans (2019) investigated the relationship between internet usage and democracy in Africa. The author showed that internet usage has a significant negative impact on democracy while squared internet usage has a significant positive impact, both in the short- and long-run. The author further provided empirical evidence of a U-shaped pattern and a non-linear relationship between internet usage and democracy, suggesting that as internet usage increases, democracy decreases, but after a certain level of internet usage which is the turning point, democracy starts to increase. There are a few other studies that have considered digital government in Africa (e.g., Bwalya and Mutula, 2016). However, most of the studies are conceptual and micro-based, with little empirical attention to the relationship and the causality between ICT and public sector management. This study fills the gap.


275

2. Data and methodology 2.1 Data The annual panel data used in this study covers the period from 1995 to 2016 for 48 African countries.1 The data on individuals using the internet (% of population), mobile cellular subscriptions (% of population), GDP growth, inflation and general government final consumption expenditure (% of GDP) are sourced from World Bank (2017) database. Data on corruption, government effectiveness, rule of law, regulatory quality, voice and accountability, and political stability and absence of violence are collected from the Economist Intelligence Unit (2016). The African countries in this study include Algeria, Angola, Botswana, Burkina Faso, Cameroon, Cape Verde, Central African Republic, Chad, Congo, Democratic Republic of the Congo, Republic of the Cote d’Ivoire, Djibouti, Egypt, Equatorial Guinea, Ethiopia, Gabon, Gambia, Ghana, Guinea, Guinea-Bissau, Kenya, Lesotho, Liberia, Libya, Madagascar, Malawi, Mali, Mauritania, Mauritius, Morocco, Mozambique, Namibia, Niger, Nigeria, Rwanda, Sao Tome and Principe, Senegal, Seychelles, Sierra Leone, South Africa, Sudan, Swaziland, Tanzania, Togo, Tunisia, Uganda, Zambia and Zimbabwe. 2.2. Model specification In line with the theoretical and empirical literature on digital government (e.g., Mimbi and Bankole, 2016; Evans, 2019), the model for this study is given as:

Govtt =τ0 + τ1Ictt+τ1Inflt + τ1Grot + τ1Cort + τ1Voat + τ1Gefft + τ1Polst + τ1Regqt + τ1Ictt (1) where Govt is general government final consumption expenditure (% of GDP); ICT is information communication technologies; Infl is inflation; Gro is economic growth; Cor is control of corruption; Geff is government effectiveness; Rule is rule of law; Regq is regulatory quality; Voa is voice and accountability; and Pols is political stability and absence of violence. ICT is a multi-dimensional concept which no single variable can capture. In this study, therefore, the ICT index (Ict) is constructed from the two commonly used ICT indicators in the literature: (i) (ii) log of mobile cellular subscriptions (% of population), and (ii) log of number of internet users 1

The list of countries is in the appendix.

276


(% of population). Theoretically, this index of ICT captures most of the information in the original dataset which consists of two ICT indicators. The results from the principal component analysis are shown in Table 1. The eigenvalues show that the first principal component explains the variations better and therefore is the best indicator of ICT in this case. After rescaling, the individual contributions of internet usage and mobile subscriptions are 51.4% and 48.6% respectively. This serves as the basis of weighting to construct the ICT index, denoted as Ict. Table 1. Principal component analysis for the ICT index PCA 1

PCA 2

Eigenvalues

2.711

0.134

% of variance

0.958

0.042

Cumulative %

0.958

1.000

Variable

Vector 1

Vector 2

Log of number of Internet users (% of population)

−0.539

−0.113

Log of mobile cellular subscriptions (% of population)

−0.564

0.350

Identification and proxies of the variables are based on the existing literature on the determinants of public value (Afonso, Schuknecht and Tanzi, 2010; Williams and Shearer, 2011; Mimbi and Bankole, 2016; Evans, 2019). GDP per capita and inflation are important economic factors (James et al., 2012; Markusen, 2013). Institutions are also important factors for public value (Bryson, Crosby and Bloomberg, 2014; Mimbi and Bankole, 2016; Evans et al., 2018; Yeager, 2018) as public managers cannot operate in a vacuum, but make decisions within large and complex political and institutional environments. 2.3. Econometric technique The panel generalized method of moments (GMM) approach is used in this study. Arellano and Bover (1995) and Blundell and Bond (1998) proposed a system GMM estimator which combines differences with the regression in levels and uses the lagged values of the dependent and other explanatory variables as the instruments for the regression in differences and the lagged differences of the explanatory variables as the instruments for the regression in levels. The advantage of the system GMM is that it precludes the problems of heteroscedasticity, autocorrelation, causality inverse and biasedness from omission of explanatory variables.


277

The Toda-Yamamoto approach to causality technique is used to estimate the causality between ICT and public sector management. The Toda-Yamamoto causality technique is more advanced than other causality techniques such as the conventional Granger causality test (Granger, 1969). The two main advantages of this causality technique are: it is applicable irrespective of the order of integration of underlying variables and irrespective of whether or not the variables are cointegrated (Toda and Yamamoto, 1995).

3. Estimation and empirical results The GMM estimations are carried out for two sample periods (1995– 2015 and 2005–2015) in order to ensure that the results are robust for different periods (Tables 2 and 3). ICT has a positive and statistically significant relationship with government spending, showing that an increase in ICT in the region is associated with improved public sector management. Furthermore, inflation, economic growth, corruption control, government effectiveness, rule of law, voice and accountability, and political stability and absence of violence have significant effects, meaning that political economy and institutions are important for public sector management. Table 2. GMM estimates (1995–2015). Dependent variable: government spending (Govt) Variable

Coeff.

Std. Error

ICT

10.19*

0.96

Inflation (Infl)

1.18*

0.12

Economic growth (Gro)

3.20*

0.54

Corruption control (Cor)

2.74*

0.47

Voice and accountability (Voa)

5.87**

2.98

Government effectiveness (Geff)

8.74*

2.97

Political stability (Pols)

8.00*

2.53

Regulatory quality (Regq)

-0.66

2.44

Rule of law (Rule)

9.73*

3.44

Adjusted R2

0.74

Note: *, ** and *** denote the significance level of 1%, 5% and 10% respectively. ( ) denote standard errors and [ ] denote p-value.

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Table 3. GMM estimates (2015–2016). Dependent variable: government spending (Govt) Variable ICT Inflation (Infl) Economic growth (Gro) Corruption control (Cor) Voice and accountability (Voa) Government effectiveness (Geff) Political stability (Pols) Regulatory quality (Regq) Rule of law (Rule) Adjusted R2

Coeff. 9.54* -0.93*** 1.19* 3.21* 5.57*** 8.14** 8.82* -1.55 8.48** 0.73

Std. Error 1.07 0.58 0.12 0.54 3.28 3.30 2.69 2.64 3.90

The results of the Toda-Yamamoto causality tests are summarized in Table 4. The empirical results show that there is bi-directional causality between ICT and government spending. This indicates that ICT spurs government spending which, in turn, spurs ICT usage even further in these countries. Table 4. Toda-Yamamoto causality test results

Direction of Causality ICT Govt

→ Govt → ICT

χ2-stat 10.03* 6.40***

Notes: * and *** indicate statistical significance at 1and 10 percent. The optimal lag length was selected using the Schwarz information criteria.

4. Discussion and implications The empirical evidence has shown that ICT has a positive and statistically significant effect, meaning that the increase in ICT in the region is associated with improved public sector management. This finding is consistent with previous research on digital government adoption, and provides insights into the way forward for accelerating digital government policy implementation. First, ICT infrastructure is a prerequisite for digital government implementation.


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Since ICT is a composite measure of internet and mobile penetration, ICT usage for digital government must embrace not only mobile network coverage or mobile phone subscriptions but also internet technology and web applications. There is also a bi-directional causality between ICT and public sector management. This indicates that ICT spurs public sector management which, in turn, boosts ICT usage even further in these countries. That is, ICT is a function of public sector management while public sector management is also a function of ICT. This evidence is supported by many studies (e.g., Munthali et al., 2018; Evans, 2019) which suggested that ICT improves public value and public sector management. Generally, investments in public sector information systems by governments are associated with organizational transformations aimed at enhancing efficiency and policy effectiveness (Gil-Garcia and Pardo, 2005; Kamarck, 2007). In this context, ICT in the public sector is deployed to enhance organizational efficiency and effectiveness and therefore reduce bureaucracy. Another noticeable result is that inflation, economic growth, corruption control, government effectiveness, rule of law, voice and accountability, and political stability and absence of violence have significant effects, meaning that political economy and institutions are important for public value and public sector management. These findings are comparable to studies such as Stea and Harindranath (2006), Bryson et al. (2014), Mimbi and Bankole (2016); Evans et al. (2018), and Yeager (2018). The political economy and institutional considerations play an important role in the underlying rationale for adopting particular policies and practices of digital government. Unique aspects of the culture and background within any given country should be identified and understood as part of the effort to implement digital government (Stea and Harindranath, 2006).

Conclusions This study has examined the relationship and causality between ICT and public sector management in Africa for the period 1995–2015 using panel GMM model and Toda-Yamamoto causality tests. The empirical evidence has shown that ICT has a positive and statistically significant effect, meaning that an increase in ICT in the region is associated with improved public sector management. There is also a bi-directional causality between ICT and public sector management, suggesting that ICT spurs public sector management

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which, in turn, spurs ICT even further in these countries. Furthermore, inflation, economic growth, corruption control, government effectiveness, rule of law, voice and accountability, and political stability and absence of violence has significant effects, meaning that political economy and institutions are important for public value and public sector management. While the literature has suggested a positive relationship between ICT and public sector management (e.g., Pang et al., 2014; Scupola and Zanfei, 2016; Strielkowski et al., 2017), this study has gone a step further and expanded the literature by empirically examining the relationship and causality between ICT and public sector management. Additionally, the study also provided new insights into the relationship between economic and institutional factors and public sector management. In other words, the study went beyond the inquiry of the relationship between ICT and public sector management and revealed the significance of economic and institutional factors on public sector management. In this manner, the study shows that ICT and economic and institutional factors play significant roles in public sector management. The findings of this study have several important policy implications for policymakers. The study has shown that ICT has a positive and significant relationship with public sector management. The implication is that, as many African economies begin to tread the path of digital government, ICT should be the building block upon which modern African public sector management is built. Through the combined use of ICT for the creation, development and interlinking of a variety of social, institutional and technological ecologies to deliver public services which are perceived as legitimate, innovative, useful and welfare-enhancing, ICT solutions can enhance the capacity of public managers in Africa. This may further benefit the community by bringing together “the public sector, civil society and international actors, as well as by improving consultation with, and participation by, all spheres of society and achieving a more participatory process of governance and decision-making” (Navarra and Cornford, 2005: 10). In view of this, policymakers and public managers need to pay more attention to ICT trends to ensure that the potential gains are fully maximized. All stakeholders have the responsibility to collaborate to develop policies and applications that will maximize the benefits of ICT at every level of public sector in Africa. Obviously, almost all governments in African countries have ongoing ICT projects aimed at efficiency of administration and improvement of public sector services. ICT infrastructural enhancements aimed at reducing the costs of internet bandwidth will contribute to the speedy implementation of enlarged digital government. It is important to note that developing digital government in Africa will require huge technical knowledge, experience, and financial investment.


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African countries will need to tap into resources and expertise of local, regional, and international participants as stakeholders. Important stakeholders must be involved in the digital government efforts: citizens, professionals, academia, businesses, governments, international agencies, technology developers, suppliers, users, and other decision-makers. Efforts should be made to use ICT as tools for the integration of ICT throughout government operations. Governments should take advantage of the increasing use of Web 2.0, social media, and mobile and wireless ICT to influence the way public services are provided and how citizen engagement processes are delivered. There is ample room for future studies. Right now, digital government is enmeshed in often vague definitions, conceptualizations, and measurements. In order to make progress, however, public administration scholars and practitioners should address the challenges associated with current definitions, conceptualizations, and measurements, in part through further conceptual refinement, the advance of suitable typologies and measures, and rigorous empirical investigation. Further studies are needed to consider how ICT could be channeled for the real struggles public managers face, especially within different political and cultural contexts in Africa. A good starting point would be to build further research into the extent to which policies and institutional arrangements are better suited to produce a system to enhance participation in digital government and the delivery of new digital government services.

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Olaniyi Evans is a faculty member at Pan Atlantic University, Lagos, Nigeria. His research interests encompasses public policy, economic modeling, financial inclusion, digital economy and dynamic stochastic general equilibrium (DSGE) modelling from an African economic perspective. His research has been published in leading journals including the Journal of Developing Areas, Business Economics, Journal of Economic Studies, Digital Policy, Regulation and Governance and Tourism Economics, among many others. He is an award-winning author whose works include “How to Get a First-Class Degree”, “The Art of Research” and “iMathematics”. He received his BSc (first-class) and MSc (distinction) degrees in Economics from the University of Lagos where he is currently a PhD candidate.

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About the editors Włodzimierz Sroka, PhD, is an associate professor at the Management Department of WSB University in Dąbrowa Górnicza, Poland. He specializes in theoretical and practical issues relating to management and strategic management. He is the author of numerous scientific papers about strategic alliances, network organizations, strategy, restructuring of companies, CSR and business ethics, as well as innovations and entrepreneurship, published both in Polish and international journals, and also monographs published by reputable publishers such as Springer Verlag and Shaker Verlag. He is also a member of editorial teams and editorial boards for numerous scientific journals, e.g. Editor-in-Chief at the Forum Scientiae Oeconomia, guest editor and editorial board member at Sustainability (Impact Factor 2,075; indexed in Web of Science and SCOPUS), senior editor at the European Journal of International Management (Impact Factor 0,83; indexed in Web of Science and SCOPUS), co-editor at Organizacija (indexed in Web of Science and SCOPUS), member of International Advisory Board at Engineering Management in Production and Services (indexed in SCOPUS), member of editorial board at Marketing and Management of Innovations (indexed in Web of Science). Currently he merges his scientific activity with being the CEO of a medium-size engineering company. He was previously employed in different managerial positions (Director, Member of the Management Board, Vice President of the Board and Managing Director) in both the steel and machine industries, running very large (over 10,000 employees), large (over 1,000 employees) and medium size enterprises. He has also been a member of the supervisory boards at different companies, operating in the steel, machine and chemical industries. Joanna Kurowska-Pysz, PhD, is a doctor of economic sciences in the field of management sciences, who also graduated in the field of economics, and post-graduate studies in Public Relations as well as in the field of research project management and technology commercialization. She has extensive experience in managing international projects. As a researcher focused on the field of management and also as an expert participating in project management, she specializes in: managing project partnerships and developing network collaboration in projects, knowledge management in projects, communication with project stakeholders, monitoring and evaluation of projects. She combines her professional experience in this field with scientific interests, which have resulted in many scientific publications on managing international projects, including cross-border projects. Joanna Kurowska-Pysz

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About the editors

also performs the function of the Director of the Institute of Studies on Territorial and Inter-Organizational Cooperation as well as working in the position of Director of the Technology Transfer Centre at the WSB University in Dąbrowa Górnicza, Poland. Łukasz Wróblewski, PhD, specializes in theoretical and practical issues relating to marketing and strategic management. He is the author of over 70 scientific publications, among others, five books on the issues of management and marketing in cultural institutions. He was an editor-in-chief for Cultural Management: Science and Education (CMSE) (Berlin: Logos Verlag) and a guest editor of Sustainability Cultural Management – a special issue of Sustainability Journal (Basel, Switzerland). He has been a speaker and participant in more than one hundred scientific conferences, as well as numerous training courses and workshops. He has also organized several symposiums and conferences on this management and marketing specialty in Poland and the Czech Republic. Currently he is lecturer of marketing and marketing management at the WSB University in Dąbrowa Górnicza, Poland. Jana Klieštiková, PhD, is an associate professor at the Department of Economics, Faculty of Operation and Economics of Transport and Communications, University of Zilina, Slovak Republic, where she teaches Marketing and Commercial Law. Her professional and research activities are focused mainly on the issue of the marketing management and corporate law. She is a national coordinator of EUF in ERASMUS KA2 Strategic Partnership Project 2018 to 2021 titled “Innovative integrated tools for financial literacy education across Europe”. She has more than 30 records in the databases WoS or SCOPUS with more than 80 citations. Her current h-index value is 6. Nowadays, she is a member of scientific or editorial boards for several scientific conferences and journals, e.g. deputy Editor-in-Chief at Ekonomicko-manazerske spectrum, member of the editorial board for the Journal of Self-Governance and Management Economics (ISSN: 2329-4175, e-ISSN: 2377-0996) and Psychosociological Issues in Human Resource Management (ISSN: 2332-399X, e-ISSN: 2377-0716) (New York: ADDLETON ACADEMIC PUBLISHERS. Since 2016, she has cooperated with the publishing house Taylor & Francis as a reviewer for the Journal of Marketing Communications (ISSN: 1352-7266, H Index=25, SCOPUS), Journal of Marketing Management (ISSN: 0267-257X, H Index=21, SCOPUS) and Journal of Global Scholars of Marketing Science (ISSN: 2163-9159).