Economic and Social Development

Varazdin Development and Entrepreneurship Agency in cooperation with

University North, Croatia Faculty of Management University of Warsaw, Poland

Economic and Social Development 27th International Scientific Conference on Economic and Social Development

Editors: Marta Bozina Beros, Nicholas Recker, Melita Kozina

Book of Proceedings

Rome, 1-2 March 2018

Varazdin Development and Entrepreneurship Agency in cooperation with

University North, Croatia Faculty of Management University of Warsaw, Poland

Editors: Marta Bozina Beros, Nicholas Recker, Melita Kozina

Economic and Social Development th

27 International Scientific Conference on Economic and Social Development

Book of Proceedings

Rome, 1-2 March 2018

Title  Economic and Social Development (Book of Proceedings), 27th International Scientific Conference on Economic and Social Development Editors  Marta Bozina Beros, Nicholas Recker, Melita Kozina Scientific Committee  Marijan Cingula, University of Zagreb, Croatia (President); Ayuba A. Aminu, University of Maiduguri, Maiduguri, Nigeria; Anona Armstrong, Victoria University, Australia; Gouri Sankar Bandyopadhyay, The University of Burdwan, Rajbati Bardhaman, India; Haimanti Banerji, Indian Institute of Technology, Kharagpur, India; Alla Bobyleva, The Lomonosov Moscow State University, Russia; Leonid K. Bobrov, State University of Economics and Management, Novosibirsk, Russia; Rado Bohinc, University of Ljubljana, Slovenia; Zeki Atil Bulut, Dokuz Eylul University, Turkey; Adnan Celik, Selcuk University - Konya, Turkey; Angelo Maia Cister, Federal University of Rio de Janeiro, Brasil; Mirela Cristea, University of Craiova, Romania; Sreten Cuzovic, University of Nis, Serbia; Oguz Demir, Istanbul Commerce University, Turkey; T.S. Devaraja, University of Mysore, India; Onur Dogan, Dokuz Eylul University, Turkey; Darko Dukic, University of Osijek, Croatia; Gordana Dukic, University of Osijek, Croatia; Alba Dumi, Vlora University, Vlore, Albania; Ksenija Dumicic, University of Zagreb, Croatia; Galina Pavlovna Gagarinskaya, Samara State University, Russia; Fran Galetic, Zagreb University, Croatia; Mirjana Gligoric, Faculty of Economics, Belgrade University, Serbia; Mehmet Emre Gorgulu, Afyon Kocatepe University, Turkey; Liudmila Guzikova, Peter the Great Saint-Petersburg Polytechnic University, Russia; Anica Hunjet, University North, Koprivnica, Croatia; Oxana Ivanova, Ulyanovsk State Universit y, Ulyanovsk, Russia; Irena Jankovic, Faculty of Economics, Belgrade University, Serbia; Lara Jelenc, University of Rijeka, Croatia; Myrl Jones, Radford University, USA; Gorazd Justinek, Graduate School of Government and European Studies, Slovenia; Hacer Simay Karaalp, Pamukkale University,Turkey; Grzegorz Karasiewicz, University of Warsaw, Poland; Dafna Kariv, The College of Management Academic Studies, Rishon Le Zion, Israel; Salih Katircioglu, Eastern Mediterranean University, Northern Cyprus, Turkey; Hilal Yildirir Keser, Uludag University, Bursa, Turkey; Sophia Khalimova, Institute of Economics and Industrial Engineering of Siberian Branch of Russian Academy of Science, Novosibirsk, Russia; Marina Klacmer Calopa, University of Zagreb, Croatia; Vladimir Kovsca, University of Zagreb, Croatia; Goran Kozina, University North, Koprivnica, Croatia; Dzenan Kulovic, Univeristy of Zenica, Bosnia and Herzegovina; Robert Lewis, Les Roches Gruyère University of Applied Sciences, Bulle, Switzerland; Ladis lav Lukas, Univ. of West Bohemia, Faculty of Economics, Czech Republic; Pascal Marty, University of La Rochelle, France; Vaidotas Matutis, Vilnius University, Lithuania; Marjana Merkac Skok, GEA College of Entrepreneurship, Ljubljana, Slovenija; Daniel Francois Meyer, North West University, South Africa; Marin Milkovic, Rector, University North, Koprivnica, Croatia; Gratiela Georgiana Noja, West University of Timisoara, Romania; Zsuzsanna Novak, Corvinus University of Budapest, Hungary; Alojzy Z. Nowak, University of Warsaw, Poland; Mislav Ante Omazic, University of Zagreb, Croatia; Vera Palea, Universita degli Studi di Torino, Italy; Dusko Pavlovic, President DIU Libertas International University, Zagreb, Croatia; Igor Pihir, University of Zagreb, Croatia; Dinko Primorac, University North, Koprivnica, Croatia; Zeljka Primorac, University of Split, Croatia; Miroslaw Przygoda, University of Warsaw, Poland; Nicholas Recker, Metropolitan State University of Denver, USA; Kerry Redican, Virginia Tech, Blacksburg, USA; Humberto Ribeiro, University of Aveiro, Portugal; Robert Rybnicek, University of Graz, Austria; Elzbieta Szymanska, Bialystok University of Technology, Poland; Katarzyna Szymanska, The State Higher School of Vocational Education in Ciechanow, Poland; Jan Turyna, University of Warsaw, Poland; Ilaria Tutore, University of Naples Parthenope, Italy; Rebeka Danijela Vlahov, University of Zagreb; Ilko Vrankic, University of Zagreb, Croatia; Thomas Will, Agnes Scott College, USA; Li Yongqiang, Victoria University, Australia; Peter Zabielskis, University of Macau, China; Tao Zeng, Wilfrid Laurier University, Waterloo, Canada; Snezana Zivkovic, University of Nis, Serbia. Review Committee  Marina Klacmer Calopa (President); Ana Aleksic; Ayuba Aminu; Mihovil Andjelinovic; Josip Arneric; Lidija Bagaric; Tomislav Bakovic; Sanja Blazevic; Leonid Bobrov; Ruzica Brecic; Anita Ceh Casni; Mirela Cristea; Oguz Demir; Stjepan Dvorski; Robert Fabac; Ivica Filipovic; Sinisa Franjic; Fran Galetic; Mirjana Gligoric; Tomislav Globan; Anita Goltnik Urnaut; Tomislav Herceg; Irena Jankovic; Emina Jerkovic; Dafna Kariv; Oliver Kesar; Hilal Yildirir Keser; Martina Dragija Kostic; Tatjana Kovac; Vladimir Kovsca; Angelo Maia Cister; Katarina Marosevic; Vaidotas Matutis; Marjana Merkac Skok; Josip Mikulic; Ljubica Milanovic Glavan; Daniel Francois Meyer; Natanya Meyer; Guenter Mueller; Ivana Nacinovic Braje; Gratiela Georgiana Noja; Zsuzsanna Novak; Alka Obadic; Claudia Ogrean; Igor Pihir; Najla Podrug; Vojko Potocan; Dinko Primorac; Zeljka Primorac; Sanda Renko; Souhaila Said; Armando Javier Sanchez Diaz; Tomislav Sekur; Lorena Skuflic; Mirko Smoljic; Petar Soric; Mario Spremic; Matjaz Stor; Tomasz Studzieniecki; Lejla Tijanic; Daniel Tomic; Boris Tusek; Rebeka Daniela Vlahov; Ilko Vrankic; Thomas Will; Zoran Wittine; Tao Zeng; Snezana Zivkovic; Berislav Zmuk. Organizing Committee  Domagoj Cingula (President); Marina Klacmer Calopa; Spomenko Kesina; Erlino Koscak; Miroslaw Przygoda; Rebeka Danijela Vlahov; Sime Vucetic. Publishing Editor  Domagoj Cingula Publisher  Design  Print  Varazdin Development and Entrepreneurship Agency, Varazdin, Croatia Faculty of Management University of Warsaw, Warsaw, Poland University North, Koprivnica, Croatia Printing  Online Edition ISSN 1849-7535 The Book is open access and double-blind peer reviewed. Our past Books are indexed and abstracted by ProQuest, EconBIZ, CPCI (WoS) and EconLit databases and available for download in a PDF format from the Economic and Social Development Conference website: http://www.esd-conference.com © 2018 Varazdin Development and Entrepreneurship Agency, Varazdin, Croatia; Faculty of Management University of Warsaw, Warsaw, Poland; University North, Koprivnica, Croatia. All rights reserved. Authors are responsible for the linguistic and technical accuracy of their contributions. Authors keep their copyrights for further publishing.

CONTENTS PRIVATE ENFORCEMENT OF COMPETITION LAW IN CROATIA – THE NEW ACT ON ACTIONS FOR DAMAGES FOR INFRINGEMENT OF COMPETITION LAW .......................................................................................................................................... 1 Ana Poscic ENTREPRENEURIAL ENVIRONMENTS IN INSTITUTIONAL TRANSITIONS ...... 8 Arilova A. Randrianasolo, Jenny Rakotoarisoa GLOBAL FINANCIAL CRISIS, EUROPEAN CENTRAL BANK AND FINANCIAL POSITION OF ECONOMIC AGENTS: A DYNAMIC COMPUTABLE GENERAL EQUILIBRIUM MODEL FOR ITALY ...................... 17 Irfan Ahmed, Claudio Socci, Francesca Severini, Qaiser Rafique Yasser EMPIRICAL TESTS OF VARIOUS CYCLE EXTRACTION METHODS; GDP VS. INDUSTRIAL PRODUCTION IN CROATIA ................................................................... 27 Daniel Tomic, Sasa Stjepanovic THE OPTIMAL MODEL FOR ATTRACTING FOREIGN DIRECT INVESTMENT: THE CASE OF THE REPUBLIC OF CROATIA .............................................................. 38 Vlatka Bilas, Zdenko Lucic THE ESSENCE OF INVESTING IN ENVIRONMENTAL, SOCIAL AND GOVERNANCE SPACE (ESG) IN SOUTH AFRICA ...................................................... 47 Emmanuel Innocents Edoun, Dudu Mbatha THE CONCEPT OF CUSTOMER RELATIONSHIP MANAGEMENT (CRM) IN HIGHER EDUCATION ........................................................................................................ 52 Sprajc Polona, Podbregar Iztok THE INFLUENCE OF SERVQUAL MODEL AND ATTITUDE ON CUSTOMER’S SATISFACTION AND LOYALTY IN ISLAMIC BANKS OF SAUDI ARABIA IN DEVELOPING COUNTRIES .............................................................................................. 59 Feras Alnaser PROCESS AND PRODUCT ECO-INNOVATION IN THE PRACTICE OF THE COMPANIES INCLUDED IN THE RESPECT INDEX ................................................... 71 Bogna Janik ASSESSMENT OF GLOBAL COMPETITIVENESS: METHODOLOGY AND ITS IMPLICATION FOR EU AND EEU ................................................................................. 78 Arpine Sargsyan GOVERNANCE OF NON-ECONOMIC PUBLIC SERVICES IN THE REPUBLIC OF SLOVENIA ............................................................................................................................. 88 Bojan Ticar

THE RESEARCH AND INNOVATION OF SMART SPECIALISATION STRATEGIES: THE TRANSITION FROM THE TRIPLE TO QUADRUPLE HELIX .................................................................................................................................................. 94 Mark Deakin, Luca Mora, Alasdair Reid DIGITAL TRANSFORMATION AND E-BUSINESS IN CROATIAN COMPANIES ................................................................................................................................................ 104 Igor Pihir, Nikolina Zajdela Hrustek, Renata Mekovec SETTING THE COUNTERCYCLICAL CAPITAL BUFFER THROUGHOUT THE FINANCIAL CYCLE .......................................................................................................... 111 Jan Frait, Jan Hajek, Miroslav Plasil ASSESSMENT OF THE ECONOMIC DEVELOPMENT OF REGIONS IN POLAND USING MULTIDIMENSIONAL COMPARATIVE ANALYSIS ................................... 121 Julia Wojciechowska-Solis THE CREDIT-TO-GDP GAP: EVIDENCE FROM ARMENIA ................................... 131 Knarik Ayvazyan ANALYSIS OF ENVIRONMENTAL TAX REFORMS IN SELECTED EUROPEAN UNION COUNTRIES .......................................................................................................... 140 Maja Kunstelj, Matej Svigelj CONSUMER CONFIDENCE AND STOCK PRICES IN CROATIA ........................... 150 Manuel Benazic, Dean Uckar PROTECTION OF PERSONAL DATA AND PUBLIC AND PRIVATE SECTOR PROVISIONS IN THE IMPLEMENTATION OF THE GENERAL EU DIRECTIVE ON PERSONAL DATA (GDPR) ............................................................................................... 161 Marija Boban DEFENCE AND MILITARY ASPECTS REGARDING THE PARTNERSHIP BETWEEN NATO AND THE EU ..................................................................................... 170 Marius-Alin Pricopi STYLIZED FACTS ON SMART SPECIALISATION RESEARCH ............................. 176 Luca Mora, Mark Deakin, Alasdair Reid THE RESEARCH OF STUDENTS ATTITUDES TOWARDS MIGRATION AFTER GRADUATION .................................................................................................................... 186 Sandra Mrvica Madarac CAUSAL RELATIONSHIP BETWEEN FOREIGN DIRECT INVESTMENTS AND MACRO-LEVEL POLITICAL STABILITY IN TURKEY ............................................ 196 Onur Basar Ozbozkurt, Elma Satrovic THE WAR ON THE CEREALS MARKET - THE EUROPEAN UNION VERSUS THE UNITED STATES OF AMERICA ..................................................................................... 206 Ovidiu-Mihai Popescu

THE IMPORTANCE OF THE INTERNET IN FORMING OF THE PUBLIC OPINION AND ITS INDISPENSABILITY FOR CONTEMPORARY ECONOMY: AN ONLINE SURVEY ............................................................................................................................... 214 Petar Kurecic, Petar Miljkovic, Petra Bagaric NEW CHALLENGES FOR TOURISM MANAGEMENT AND MARKETING ECOTOURISM IN ROMANIA .......................................................................................... 225 Petrica Stefan ANALYSIS OF THE OPPORTUNITIES AND THREATS OF INNOVATIVE SMES IN THE EU ................................................................................................................................. 233 Raluca Florentina Cretu NEW CHALLENGES IN TOURISM MANAGEMENT - IMPLEMENTATION OF THE ECOLOGICAL LABEL IN AGROTURISM ................................................................... 243 Romeo Catalin Cretu THE IMPACT OF THE EUROPEAN SOCIAL FUND ON ECONOMIC AND SOCIAL DEVELOPMENT IN ROMANIA ...................................................................................... 252 Stefan-Florin Corcodel POSSIBLE MODELS OF POST-BREXIT OUTCOMES – FROM CARICOM AND EU PERSPECTIVES .................................................................................................................. 261 Elzbieta Szymanska, Alexander Wollenberg ANALYZE OF HUMAN RESOURCE ALLOCATION IN HIGHER EDUCATION APPLYING INTEGER LINEAR PROGRAMMING...................................................... 266 Ivana Tadic, Branka Marasovic BUSINESS CASES AS SCENARIOS IN THE FRAME OF INTEGRATING CASE METHOD AND DRAMA TECHNIQUES IN TEACHING ENGLISH......................... 277 Vitally Cherenkov, Natalia Cherenkova MANAGER’S AUTHORITY– THE EXPERIENCES OF POLISH MANAGERIAL STAFF ................................................................................................................................... 294 Joanna M. Moczydlowska, Krystyna Leszczewska EFFECTIVE INVESTMENT THROUGH SOUND STRATEGIES AND POLICIES 303 Emmanuel Innocents Edoun, Dudu Mbatha BANK-SPECIFIC DETERMINANTS OF COOPERATIVE BANKS' PROFITABILITY IN POLAND .......................................................................................................................... 308 Maria Magdalena Golec THE ROLE OF IMMIGRANT WORKERS IN PRODUCTIVITY AND ITS MAIN COMPONENTS IN OECD COUNTRIES......................................................................... 317 Maria Jose Miranda-Martel, Antonio Mihi-Ramirez, Sara Ojeda-Gonzalez EVALUATION OF STATE FINANCIAL ASSETS IN THE FORM OF SHARES AND STAKES IN ENTERPRISES OWNED BY THE REPUBLIC OF CROATIA ............. 327 Vesna Vasicek, Sanja Broz Tominac

CORPORATE CASH HOLDINGS: AN EMPIRICAL INVESTIGATION OF SOUTHEAST EUROPEAN COMPANIES..................................................................................... 339 Aleksandar Naumoski CORPORATE SOCIAL RESPONSIBILITY IN COMMERCIAL BANKING SECTOR IN CROATIA ........................................................................................................................ 350 Ana Vukusic, Ivan Peronja CORPORATE INCOME TAX REVENUE DETERMINANTS: HOW IMPORTANT IS THE TAX RATE? ................................................................................................................ 361 Andrzej Karpowicz, Elzbieta Majewska EMPLOYEE VALUE PROPOSITION AS A TOOL OF EMPLOYER BRANDING . 370 Anna Bagienska SERVICE QUALITY AND CUSTOMER SATISFACTION IN BUSINESS CONSULTING SERVICES: AN IMPORTANCE- PERFORMANCE ANALYSIS BASED ON THE PARTIAL LEAST SQUARE METHOD ............................................ 380 Dragan Benazic, Nikolina Varga THE IMPACT OF NOSTALGIC FEELINGS ON AN EVALUATION OF BRANDS' PERCEIVED QUALITY ..................................................................................................... 392 Magdalena Grebosz-Krawczyk PRIORITIZATION OF SINGLE ORDERS IN A MANUFACTURING – SERVICE ENTERPRISE WITH APPLICATION OF THE AHP METHOD ................................ 402 Katarzyna Marek-Kolodziej, Iwona Lapunka, Piotr Wittbrodt THE STUDENT LOANS IN SLOVAKIA - THE ECONOMIC IMPACT ON NATIONAL STUDENT SUPPORT SYSTEM DEVELOPMENT........................................................ 411 Maria Bartekova, Ľudomir Slahor MARKET CAPITALIZATION, ENTERPRISE VALUE AND BRAND VALUE OF THE WORLD`S MOST REPUTABLE COMPANIES ............................................................. 420 Mihaela Herciu DYNAMIC STRATEGIES FOR ECONOMIC AND ECOLOGICAL GLOCAL CLUSTERING ..................................................................................................................... 429 Mihai V. Putz, Ioan Petrisor RESEARCH OF THE ROLE OF STATE PROCUREMENTS IN RUSSIA: EXAMPLE OF THE RADIO-ELECTRONIC INDUSTRY................................................................. 439 Razvadovskaya Yuliya, Indukaev Victor UNDERSTANDING TOURIST SPENDING ON CULTURE AND ENTERTAINMENT ................................................................................................................................................ 448 Daniela Soldic Frleta, Dora Smolcic Jurdana INDUSTRY 4.0 – FUTURE OF PRODUCTION SYSTEMS .......................................... 461 Piotr Wittbrodt, Iwona Lapunka, Katarzyna Marek-Kolodziej

COMPETITIVE ADVANTAGES IN MILLENNIALS’ REALITY............................... 468 Tomasz Rosiak, Agnieszka Postula THE LEVEL OF PSYCHOSOCIAL RISK IN ACADEMIC PROFESSIONALS WORK - DIFFERENTIATION AND SELECTED NEGATIVE OUTCOMES ......................... 476 Agnieszka Springer, Iwona Werner FOREIGN VERSUS LOCALLY-OWNED COMPANIES: AN ANALYSIS OF POSTCRISIS PERFORMANCE IN EASTERN EUROPE ....................................................... 486 Alexandra Horobet THE ROLE OF THE NATIONAL POSTAL OPERATOR IN THE CONTEXT OF EADMINISTRATION DEVELOPMENT– EXAMPLE OF POLAND............................ 497 Anna Drab-Kurowska MANAGERIAL ASPECTS OF INNOVATIONS COSTS – CASE STUDY ................. 506 Anna Dyhdalewicz THE IMPACT OF HUMAN CAPITAL AND INNOVATION ON PORTUGAL'S ECONOMIC GROWTH: AN EMPIRICAL STUDY THROUGH STRUCTURAL EQUATION MODELS ........................................................................................................ 515 Catia Rosario, Antonio Augusto Costa, Ana Lorga da Silva INTEGRATING RESILIENCE AND SUSTAINABILITY INTO THE CORE ORGANIZATIONAL STRATEGY – IS IT POSSIBLE OR IMPERATIVE? .............. 526 Claudia Ogrean POVERTY AND EXTREMES IN NUTRITIONAL STATUS OF CHILDREN .......... 537 Ines Banjari, Rajko Odobasa OCCUPATIONAL STRESS AMONG ACADEMICS: RELATIONSHIPS WITH PSYCHOSOCAL RISK AND SUBJECTIVE HEALTH ASSESSMENT ..................... 546 Iwona Werner, Agnieszka Springer THE PERFORMANCE DYNAMICS OF TRADE COMPANIES IN CENTRAL AND EASTERN EUROPE: AN ANALYSIS OF LOCAL VERSUS FOREIGN-OWNED BUSINESSES ........................................................................................................................ 556 Lucian Belascu MONITORING THE INNOVATION ECOSYSTEM AND THE OF EFFECTIVENESS SMART SPECIALISATION STRATEGIES .................................................................... 566 Mona Roman, Olli-Pekka Mutanen ON THE CROSS-MARKET LINKAGES IN GLOBAL FINANCIAL MARKETS .... 575 Aditya Chourasiya, Aditi Kambli, Krutarth Satoskar, Rajrishi Bhaisare ECONOMIC APPLICATIONS OF ADAPTIVE KALMAN FILTER .......................... 584 S. M. Borodachev

COMPARISON AND ANALYSES OF INNOVATION CAPACITY ACCORDING TO COUNTRIES CLUSTERS .................................................................................................. 589 Ana Lorga da Silva, Catia Rosario INDEPENDENCE OF GOVERNANCE STRUCTURE IN STATE OWNED PORT AUTHORITIES - EXAMPLE OF CROATIA .................................................................. 599 Alen Jugovic, Natasa Munitic, Edvard Tijan, Gorana Stumpf DETERMINANTS OF BANK SELECTION USED BY START-UPS IN POLAND WHY IS CREDIT RATING NOT THE MAIN CRITERION USED BY THE CLIENTS WHEN SELECTING A BANK? ........................................................................................ 609 Zbigniew Korzeb INFLUENCE OF ICT ON THE LABOUR MARKET IN POLAND ............................. 617 Agnieszka Budziewicz-Guzlecka THE ROLE AND PLACE OF ISLAM IN THE STRUCTURE OF THE MODERN KAZAKHSTAN SOCIETY ................................................................................................ 626 Kurmanaliyeva Аinura, Begalinova Kalimash, Israilova Аssel INTERNATIONAL LEGAL EFFORTS TO FIGHT TERRORISM: SOME CONSTITUTIONAL IMPLICATIONS ............................................................................ 632 Anita Blagojevic COMMUNITY INCLUSIVENESS FOR TOURISM GOVERNANCE AND GLOBALIZATION: THE CASE OF KANAGAWA PREFECTURE, JAPAN............ 642 Rodolfo Delgado THE INFLUENCE OF CORPORATE SOCIAL RESPONSIBITILY ON THE COMPETITIVENESS OF COMPANIES ............ ERROR! BOOKMARK NOT DEFINED. Zelimir Dulcic, Ana Suman, Kristina Bosnjak APPROACH TO ASSESSMENT OF THE EFFECTS OF LARGE-SCALE RESEARCH INFRASTRUCTURE UNITS AT THE ECONOMY OF RECIPIENT REGION ...... 659 Elena Tkachenko, Alexander Karlik, Vladimir Platonov, Elena Rogova, Sergey Bodrunov PUBLIC INTEREST VS.THE INTEREST OF THE PUBLIC - HOW TO RECONCILE ECONOMIC IMPACT AND THE RIGHT TO INFORMATION? ............................... 669 Gordana Tkalec, Iva Rosanda Zigo THE IMPACT OF SYRIAN REFUGEES ON THE TURKISH LABOR MARKET ... 681 Huseyin Isiksal, Aliya Zhakanova Isiksal, Yossi Apeji PROJECT MANAGEMENT MODEL OF NEW PRODUCT DEVELOPMENT ........ 690 Iwona Lapunka, Katarzyna Marek-Kolodziej, Piotr Wittbrodt SMART SPECIALISATION – A COLLECTIVE AWARENESS PLATFORM AND TOOLSET FOR RIS3 STRATEGY IMPLEMENTATION ........................................... 700 Lesley Badii, Marco Tiemann, Ryan Faulkner, Nigel Hartley

ENTREPRENEURSHIP IN THE EUROPEAN UNION – FACTORS OF BUSINESS SUCCESS .............................................................................................................................. 710 Lucian Belascu, Alma Pentescu INDUSTRIAL POLICIES OF TODAY: THE GREEN INDUSTRY CONCEPT ........ 717 Marija Beg, Tomislav Sekur, Sime Smolic THE USE OF INNOVATIVE APPROACHES IN ASSESSING AND PREDICTING BUSINESS FINANCIAL HEALTH ................................................................................... 728 Jarmila Horvathova, Martina Mokrisova Z GENERATION IN CORPORATE ENVIRONMENT. HOW TO ADDRESS IT? ... 739 Maya Yaneva IMPACT OF FINANCIAL DATA QUALITY ON MODELS USED TO DESCRIBE TRANSITORY EARNINGS ............................................................................................... 746 Miroslava Vlckova, Tomas Buus AGROKOR – A CASE OF CONTROLLED COLLAPSE* ............................................ 753 Nenad Rancic VALUE-BASED APPROACH FOR MEASURING THE INTELLECTUAL CAPITAL OF THE UNIVERSITY ....................................................................................................... 763 Pavel Novgorodov FINANCING OF AGRICULTURE AND RURAL AREAS IN THE BALTIC STATES ................................................................................................................................................ 772 Zofia Koloszko-Chomentowska THE LINK BETWEEN BRAND VALUE AND INTELLECTUAL CAPITAL: INCORPORATING BRANDS INTO ECONOMIC VALUATION ............................... 779 Stefania-Cristina Curea DISTINCTIVENESS AND QUALITY OF UNIVERSITY NORTH ON THE HIGHER EDUCATION MARKET IN THE REPUBLIC OF CROATIA ..................................... 790 Anica Hunjet, Goran Kozina, Damira Dukec FORMATION OF THE INDICATORS SYSTEM, CHARACTERIZING THE POPULATION SATISFACTION BY HEALTH CARE QUALITY IN THE FIELD OF COMPULSORY MEDICAL INSURANCE OF RUSSIA ................................................ 804 Olga Kaurova, Alexander Maloletko QUALITATIVE RESEARCH IN ENTREPRENEURSHIP: LEARNING HOW TO PLAY THE GAME .............................................................................................................. 812 Ksenija Vukovic, Tamara Smaguc, Kristina Detelj DEVELOPING THE SYSTEM OF INTERPRETING INDICATORS OF SATISFACTION WITH THE ACCESSIBILITY AND QUALITY OF HEALTH CARE, PUBLIC AWARENESS ABOUT RIGHTS IN THE COMPULSORY MEDICAL CARE SYSTEM ............................................................................................................................... 825 Olga Shinkareva, Igor Stepkin

METHODS OF CONDUCTING SURVEYS TO MONITOR PEOPLE’S SATISFACTION WITH THE QUALITY AND AVAILABILITY OF MEDICAL CARE IN RUSSIA ............................................................................................................................ 831 Marina Vinogradova, Sergey Babakaev, Olga Shinkareva FUNCTIONING OF BIOFUELS AGAINST THE FINANCIAL SITUATION OF PRODUCERS’ IN POLAND .............................................................................................. 838 Zbigniew Kurylek HOW DOES THE RUSSIAN YOUTH PERCEIVE CORRUPTION ............................ 849 Alexander Maloletko, Yulia Keyzerova COMPETITIVE RIVALRY IN THE COFFEE AND TEA PROCESSING INDUSTRY............................................................................................................................859 Maja Darabos Longin MANAGERIAL SKILLS FOR IMPROVING PROFESSIONAL PERFORMANCE: A PERSPECTIVE FROM ENGINEERS IN CONSTRUCTION .................................................................................................................................................869 Lana Lovrencic Butkovic CONCIOUS BUYING AS SUSTAINABLE FASHION DRIVER – SURVEY ON CROATIAN STUDENTS’ ATTITUDE..............................................................................878 Mislav Ante Omazic, Alica Grilec, Irena Sabaric A META-ANALYSIS OF CORPORATE RESEARCH AND DEVELOPMENT EXPENDITURES.................................................................................................................886 Natalia Nehrebecka, Aneta Dzik-Walczak THE IMPACT OF PUBLIC EXPENDITURES ON ECONOMIC GROWTH IN THE POST TRANSITION COUNTRIES OF THE EUROPEAN UNION - PANEL DATA ANALYSIS............................................................................................................................897 Pasko Burnac, Vinko Mustra, Vladimir Simic

27th International Scientific Conference on Economic and Social Development – Rome, 1-2 March 2018

PRIVATE ENFORCEMENT OF COMPETITION LAW IN CROATIA – THE NEW ACT ON ACTIONS FOR DAMAGES FOR INFRINGEMENT OF COMPETITION LAW Ana Poscic University of Rijeka, Faculty of Law, Croatia [email protected] ABSTRACT The aim of this article is to analyse the situation in the area of damage claims for the infringement of competition law in the Republic of Croatia. The new Act on actions for damages for infringements of competition law contains substantive and procedural rules governing actions for damages for infringements of the competition law provisions. The substantive rules concern the subject matter and scope of the application, the right to full compensation, the presumption that cartel infringements cause harm, joint and several liability of undertakings’ that have caused the infringement through joint behavior, passing on overcharges, the effects of consensual settlements on subsequent actions for damages. The procedural rules consist of definitions and rules governing disclosure of evidence, especially the disclosure of evidence included in the file of a competition authority, the effect of the competition authorities' and the courts' final decisions, the limitation periods, postponement of the action for damages for up to two years due to consensual dispute resolution in respect of the claim. Special emphasis will be on certain rules that depart from our legal tradition. The author will attempt to indicate the problems resulting therefrom and offer possible clarifications. Keywords: Competition Law, Damage Claims, the European Union, the Republic of Croatia 1. INTRODUCTION There has been a lively debate on the possibilities of damage claims in the competition law in the last few years. There is a longstanding perception that private enforcement of competition rules is underdeveloped, uncertain and ineffective. In Europe private enforcement is seen as a mean of ensuring compensation for damages and also a deterrent mechanism for possible future infringements. The Directive on rules governing actions for damages for infringement of competition law (“Directive”) is the first directive enacted in the field of competition law. It has been passed on 26 November 2014. The aim of the Directive is dual. The first one is to maximize the interaction between the private and public enforcement of competition law and the second concerns the full compensation for the competition law infringements (Lianos, 2015, p. 34). The aim of this article is to scrutinize the situation in the area of damage claims for the infringement of competition law in the Republic of Croatia. The area is still in the embryonic stage in most European countries as well as in Croatia. Croatian legislator had a choice to adopt a separate act or to implement the Directive in the existing acts. The first solution was chosen. It is also important to stress that unlike other EU countries, Croatia, has not been involved in the legislative process which led to the adoption of the Directive. This article will provide some insight into the Croatian rules on the damages claims, especially after the new Act on actions for damages for infringements of competition law (“Act”) came into force. The Act contains both substantive and procedural rules governing actions for damages for infringements of the competition law provisions. Special emphasis will be on certain rules that depart from our legal tradition. The author will attempt to indicate the problems resulting therefrom and offer possible clarifications.

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2. SUBJECT MATTER AND SCOPE OT THE ACT Article 1 of the Act provides that it sets out certain rules necessary to ensure that anyone who has suffered harm caused by an infringement of competition law by an undertaking or by an association of undertakings can effectively exercise the right to claim full compensation for that harm from that undertaking or association. It should be stressed that according to our general law, we already have a rule of full compensation (Art. 1090 of the Civil Obligation Act). This Act sets out rules coordinating the enforcement of the competition rules by competition authorities and the enforcement of those rules in damages actions before competent commercial courts. The last provision is not a novelty, as the only one provision dealing with private enforcement before the Act, was the one giving the jurisdiction for the antitrust damages claims to commercial courts (Art. 34b(9) of the Civil Procedure Act). Article 3 enshrines familiar competition concepts and terms. It contains some definitions already known from the jurisprudence of the Court of Justice of the European Union (“CJEU”). This Act covers not only the infringement of provisions that regulate prohibited agreements and the abuse of dominant position but also the infringement of Art. 101 or 102 of the Treaty on the Functioning of the European Union (“TFEU”). This means that the infringement can be the infringement of Art. 101 or 102 of the TFEU and also of national competition law. According to the Act the “national competition law” means provisions of national law that predominantly pursue the same objective as Articles 101 and 102 and that are applied to the same case and in parallel to Union competition law pursuant to Article 3(1) of Regulation (EC) No 1/2003. The term court means the territorially competent commercial court and the High Commercial Court according to rules of organization and jurisdiction of courts. The right to compensation is recognized for any natural or legal person. Definition of action for damages plays a central role. An action can be brought by an alleged injured party. It also covers someone acting on behalf of one or more alleged injured parties and also natural or legal person that succeeded in the right of the alleged injured party. The last possibility encompasses collective actions by collective entity. Cartel is defined as an agreement or concerted practice between two or more competitors aimed at coordinating their competitive behavior on the market or influencing the relevant parameters of competition through practices such as, but not limited to, the fixing or coordination of purchase or selling prices or other trading conditions, including in relation to intellectual property rights, the allocation of production or sales quotas, the sharing of markets and customers, including bid-rigging, restrictions of imports or exports or anti-competitive actions against other competitors. The later examples derive from the CJEU’s case law. 3. THE RIGHT TO COMPENSATION Since the Directive is not a full harmonization directive the member states are free to introduce stricter rules so long as those rules do not conflict with the principles of the Directive. The injured party who has suffered harm caused by an infringement of competition law is able to claim and to obtain full compensation for that harm. Our legislator introduced a more extensive rule. Damage shall imply a loss of person’s assets (pure economic loss), halting of assets increase (loss of profit) and violation of privacy rights (non-material damage) plus the payment of interest (Art. 5). Our Act covers material and non-material damages. Interest is due from the time when the harm occurred until the time when the compensation is paid. This is in line with our general tort principles. Non-material damage is not limited. Regarding the non-material damage, it will be interesting to see how the infringement of competition law can affect personal rights. The Directive refers to the recovery of actual loss and loss of profit plus the payment of interest. Our legislator introduced more ways for compensation than the Directive. It can also be seen from our general rule stating that a legal person has a right for a fair money compensation for non-material damages. In the event of the violation of personality rights, an injured party may request a disclosure of the judgement or its modification at the expenses of 2


the defendant, or the court can order a just pecuniary compensation. According to our general rule a person who has caused damage to another shall compensate it unless it has proven that the damage had not occurred as a result of his fault. Lack of duty of care shall be presumed (Art. 1045 of the Civil Obligation Act). Here we are speaking of the presumed fault. The Directive requires strict liability. So an Act states that the infringer that caused harm by infringement of competition law shall be liable for damage caused regardless of fault (Art. 5). Strict liability rule requires the harm or likehood of the harm to be determined (Lianos, Davis, Nebbia, p. 34). It is argued that it can lead to unjust situations. The undertaking is always obliged to compensate for the full harm. Taking into the account the nature of harmful acts committed as competition law infringements and the characteristic of the torfeasor as an undertaking, the highest possible level of care is required. If we left the standard of presumed fault, there would be a possibility for the infringer to be exculpated by proving that the undertaking applied a high standard of care. In order to facilitate the position of injured party in the case of cartel infringement, there is a presumption that cartel infringements cause harm unless the infringer rebuts that presumption. Competition law infringements cover not only damage on assets or infringement of personal rights but also the state of market. Surprisingly the Directive left the issue of causation, thus leaving it to the national general tort law provisions. According to our legal thinking the cause must be a typical cause, one which regularly causes certain harmful consequences. There has to be shown an unbroken causal link. The causal link must connect all three elements: the harmful act, the distortion of competition and the harm to the given victim. There is one situation that helps the position of the claimant in the case of cartel infringement. The Act says that damage caused in relation with an infringement of competition law in the form of cartel, shall be considered as resulting from that cartel unless it has been proved that the cartel has not caused the damage. It is a presumption of causality. 4. EVIDENCE AND INFORMATION ASYMMETRY The Act has precise rules on the disclosure of evidence necessary for issuing damage claims and special provision of disclosure of evidence included in the file of a competition authority. Before the Act, the claimants had two possibilities to obtain the necessary documents: either to use the provisions of the Competition Act or the Act on the right of access to public information with very limited reaches. Now the situation is changed in favour of possible claimants. There is a general rule with some conditions to fulfil. The claimant has to present a reasoned justification in order for the national court to be able to order the disclosure of specified items of evidence. Articles 5 to 8 deal with different aspects of the disclosure of evidence. The disclosure of evidence has to be supported by plausible claim. The claimant has to present reasonably available facts and evidence sufficient to support the plausibility of its claim for damages. It is a safeguard clause. When we speak about competition we speak about business secrets. Special question concerns the disclosure of confidential information. There is an explicit rule granting to national judges the power to order documents containing confidential documents. This is seen an improvement as until now, we did not have precise rules on the preservation of confidential information. It is important to note that pre-existing documents that are contained in the file of competition authority may be disclosed at any time. In order to tackle the situation of information asymmetry in collecting evidence, we have articles giving competence to national courts to order disclosure of evidence from parties of the proceedings and from third parties. The national courts have a power to order the defendant or a third party to disclose relevant evidence which lies in their control, provided that the claimant has presented a reasoned justification. It is interesting to note that the Directive speaks of the categories of evidence. Our legal tradition doesn’t distinguish categories of evidence so the Act addresses “the relevant evidence”. Where relevant evidence is not within the control of the 3


defendant, but is included in the file of a competition authority, it may be required by a national court to disclose the relevant evidence provided that it cannot reasonably be obtained from another party or from the third party. The court has to safeguard the effectiveness of the public enforcement of competition law. Here the Court has a lot of discretion. There is the so-called grey list of categories of evidence, whose disclosure can be ordered by national court only after a competition authority has closed its proceedings by adopting a decision. It is important to note that there is an absolute ban on the disclosure of leniency statements and settlement submissions (Art. 9). It applies to all leniency statements (immunity from fines or a reduction of fines). The last statement is of little importance for Croatia, as according to available data there has been only one leniency submission notwithstanding the legislative act (see Regulation on the method of setting fines). When we speak about leniency we speak about the cartels. The most efficient tool to detect cartel are leniency statements. Without according protection for the applicants detecting cartels, there would not be any incentive to go to Commission or to the national agency. Evidence obtained solely through access to the file of a competition authority can be used in an action for damages only by the natural or legal person who obtained the evidence or the person succeeding to that person’s right, including the person that acquired that person’s claim. There are also “sufficiently deterrent penalties” for the parties to the proceedings, but also against third parties that do not comply with a disclosure order of a national court. 5. LIMITATION PERIODS There is a precise stipulation of when periods start to run. Limitation periods shall not begin to run before the infringement of competition law has ceased and the claimant knows, or can reasonably be expected to know of the infringement of competition law, damage and the identity of the infringer. Croatian Law changed the limitation period comparing to our general rules. Now the period for bringing action for the infringement of competition law is five instead of three years. There is precise stipulation of when periods start to run. Limitation periods shall not begin to run before the infringement of competition law has ceased and the claimant knows, or can reasonably be expected to know of the infringement of competition law, damage and the identity of the infringer. There are certain conditions to satisfy: the claimant must be aware of the behaviour and of the fact that such behaviour amounts to an infringement of completion law provisions. Possible difficulties could be with the start of the limitation period because sometimes it is difficult to establish precisely when the infringement has ceased. The limitation period is interrupted, if a competition authority takes action for the purpose of investigation or its proceedings in respect of an infringement of competition law to which the action for damages relates and for the duration of consensual dispute resolution process, but only with regard to those parties that are involved in the process. The period for bringing actions shall expire within 15 years from the date the infringement of competition law has ceased. 6. EFFECTS OF NATIONAL DECISIONS The infringement of competition law found by a final decision of the Agency or in the administrative dispute before the High Administrative Court against the decisions of the Agency is deemed to be irrefutably established for the purposes of an action for damages brought before the courts (Art. 11). This is full proof that the infringement has occurred. Where the final decision is rendered in another state, the situation is little bit different. In this case the infringement decision has to be assessed along with any other evidence adduced by the parties. Article 11 says that where the infringement of Article 101 and/or Article 102 is found by final decision taken in another Member State, it is also deemed to be established for the purpose of actions for damages, unless proven to the contrary. The national courts have discretion and it is a presumption that the national court will look into details at the facts and reach its own conclusions on the issue of infringement. Here we have a binding proof of the infringement 4


established by our Agency or the Commercial court. It will be seen how much weigh will be given to decisions adopted by other member states. These are the effects of final infringement decisions adopted by the Agency or the national review courts in the framework of subsequent actions for damages before national courts. The idea is to prevent a situation where the finding of an infringement would be re-litigated in subsequent actions for damages (Recital of the Directive, para. 34). The claimants do not have to prove the scope of the infringement again and can concentrate to the causation and the quantum of damages. 7. JOINT AND SEVERAL LIABILITY The undertakings which have infringed competition law through joint behaviour are jointly and severally liable for the harm caused by the infringement of competition law. The consequence is that each of those undertakings is bound to compensate for the harm in full, and the injured party has the right to require full compensation from any of them until he has been fully compensated. It means that it can address claim to the most solvent undertaking. Immunity recipient is fully protected except in one situation. It will be responsible to its direct and indirect purchasers and to other injured parties only where full compensation cannot be obtained from other undertakings that were involved in the same infringement of competition law. A co-infringer should have the right to obtain a contribution from other co-infringers if it has paid more compensation than its share. The determination of that share is a relative responsibility of a given infringer, and the relevant criteria could be a turnover, market share, or a role in the cartel. An infringer may recover a contribution from any other infringer, the amount of which shall be determined in the light of their relative responsibility for the harm caused by the infringement of competition law. The amount of contribution of an infringer which has been granted immunity from fines under a leniency programme shall not exceed the amount of the harm it caused to its own direct or indirect purchasers or providers. 8. THE PASSING-ON OF OVERCHARGES AND THE RIGHT TO FULL COMPENSATION The question of passing-on the overcharges is one of the most complex and discussed questions of the Directive. The overcharge is defined as the difference between the price actually paid and the price that would otherwise have prevailed in the absence of an infringement of competition law (Art. 2 para 20 of the Directive). It can be invoked by the defendant, but the defendant may try to claim that the direct purchaser did not experience any harm because it passed the overcharge on (Wijkmans, Visser, Jaques, Noël, 2016, p. 59). The principle is that the indirect purchasers, consumers included, are entitled to compensation by the infringer for the harm suffered. The defendant in an action for damages can invoke as a defense against a claim for damages the fact that the claimant passed on the whole or part of the overcharge resulting from the infringement of competition law. There can be difficulties for follow-on claimants to prove the extent of harm caused. The burden of proving that the overcharge was passed on shall be on the defendant, who may reasonably require disclosure of evidence from the claimant or from third parties (Art. 15). The burden of proof is placed on the one that does not have the necessary evidence. There is a rebuttable presumption that the indirect purchaser has shown the existence of passing-on of an overcharge to him if certain conditions are met (Art. 15 para 3). This paragraph shall not apply where the defendant can demonstrate credibly to the satisfaction of the court that the overcharge was not, or was not entirely, passed on to the indirect purchaser (Art. 15 para 4). In assessing whether the burden of proof is satisfied, the court may take due account of actions for damages that are related to the same infringement, but are brought by claimants from other levels in the supply chain, judgements resulting from the previous situation and any relevant information in the public domain purchaser (Art. 15 para 5). 5


9. QUANTIFICATION OF HARM To ease the position of the victims of the cartel the Act has a rebuttable presumption with regard to the presence of harm resulting from the cartel. The infringing undertaking can try to prove that the cartel did not cause harm. It is interesting to note there is no such presumption concerning damages caused by the abuse of a dominant position. There is an interesting ruling of mutual cooperation between the courts and national competition agencies. A national competition authority may, upon request of a national court, assist the national court with respect to the determination of the quantum of damages where that national competition authority considers such assistance to be appropriate. In order to help national courts, the Commission published Guidance on the quantification of harm (Communication from the Commission on quantifying harm in actions for damages based on breaches of Article 101 or 102 of the TFEU). 10. CONSENSUAL SETTLEMENTS The Act as well as Directive promotes the “once for-all settlement” in order to reduce uncertainty for infringers and injured parties. One of the methods are consensual dispute resolution mechanisms such as arbitration, mediation and conciliation (Lianos, Davis, Nebbia, 2015, p.60). The limitation period for bringing an action for damages will be suspended for the duration of any consensual dispute resolution process. The suspension will apply only with regard to those parties that are or that were involved or represented in the consensual dispute resolution. The period may last for up to two years. Following the consensual settlement, the claim of the settling injured party is reduced by the settling co-infringer's share of the harm that the infringement of competition law inflicted upon the injured party. Any remaining claim of the settling injured party shall be exercised only against non-settling co-infringers. Non-settling co-infringers shall not be permitted to recover contribution for the remaining claim from the settling co-infringer. Where the non-settling co-infringers cannot pay the damages that correspond to the remaining claim of the settling injured party, the settling injured party may exercise the remaining claim against the settling co-infringer. The last possibility may be expressly excluded under the terms of the consensual settlement (Art. 18). 11. CONSLUSION The new Act on action on damages for the infringements of competition is seen as a mean to reduce the shortcomings of private enforcement and to promote the damage claims. Even before the Act, Croatia had full functioning damage actions provisions. Generally speaking, our rules are already very well aligned with the rules of the Directive. The problem is that in Croatia there is a shortage of commercial courts’ jurisprudence on damage actions for infringement of the competition law provisions. A person that has suffered damage of infringement of competition law has two options. It can continue with follow-on actions or it can initiate standalone actions. Stand-alone action concerns the situation where an infringement is claimed independently of a competition authority’s decision. Follow - on basis is a more convenient situation, where claim relies on a prior decision by a competition authority finding liability and the court does not have to struggle with founding a competition law infringement. Beside the positive impact of the Act on future damage claims there are still a lot of questions that need to be clarified. Expected problems could be with the concept of objective liability that departs from our legal tradition. The Act does not contain rules dealing with the admissibility of economic evidence, causation and quantification of harm. The issue of litigation costs is left to national procedural law. The Act left the question of collective redress mechanisms. It will be seen whether there will be increased litigation following the Act.

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ACKOWLEDGEMENT: This paper has been supported in part by the Croatian Science Foundation project No. 5709 “Perspectives of maintaining the social state: towards the transformation of social security systems for individuals in personalized medicine“ and in part by the University of Rijeka project No. 13.08.1.2.03 “Social security and market competition“. LITERATURE: 1. Act on actions for damages for infringements of competition law, OG 69/17. 2. Act on the right of access to public information, OG 25/13, 85/15. 3. Bernitz U. (2016). Introduction to the Directive on Competition Damages Actions. In M. Bergström, M. Iacovides, M. Strand (eds) Harmonising EU Competition Litigation, The New Directive and Beyond, Swedish Studies (3-13). Oxford: Hart Publishing. 4. Butorac Malnar V. (2015). Access to Documents in Antitrust Litigation - EU and Croatian Perspective. Yearbook of Antitrust and Regulatory Studies, 8(12), pp.127-160. 5. Civil Obligation Act, OG 35/05, 41/08, 125/11, 78/15. 6. Civil Procedure Act, OG 53/91, 91/92, 58/93, 112/99, 88/01, 117/03, 88/05, 2/07, 84/08, 96/08, 123/08, 57/11, 148/11, 25/13, 89/14. 7. Cleynenbreugel P. V. (2016). Embedding Procedural Autonomy: The Directive and National Procedural Rules. In M. Bergström, M. Iacovides, M. Strand (eds) Harmonising EU Competition Litigation, The New Directive and Beyond, Swedish Studies (99-119). Oxford: Hart Publishing. 8. Communication from the Commission on quantifying harm in actions for damages based on breaches of Article 101 or 102 of the Treaty on the Functioning of the European Union, [2013] OJ C 167/07. 9. Competition Act, OG 79/09, 80/13. 10. Consolidated versions of the Treaty on European Union and the Treaty on the Functioning of the European Union [2012] OJ C 326/47. 11. Directive 2014/104/EU of the European Parliament and of the Council of 26 November 2014 on certain rules governing actions for damages under national law for infringements of the competition law provisions of the Member States and of the European Union [2014] OJ L 349/1. 12. Lianos I. (2015). Causal Uncertainty and Damage Claims for the Infringement of Competition Law in Europe. Yearbook of European Law, 34(1), pp. 170-231. 13. Lianos, I, Davis, P, Nebbia, P. (2015). Damage Claims for the Infringement of EU Competition Law. Oxford: Oxford University Press. 14. Maier – Rigaud F. (2014). Toward a European Directive on Damage Actions. Journal of Competition Law & Economics, 10(2), pp. 341-360. 15. Pecotić Kaufman J. (2012). How to Facilitate Damage Claims? Private Enforcement of Competition Rules in Croatia - Domestic and EU Law Perspective. Yearbook of Antitrust and Regulatory Studies, 5(7), pp.13-54. 16. Petrović S, Jakšić T. (2014). Competition law. In: T. Josipović (ed) Introduction to the Law of Croatia (357-377). AH Alphen aan den Rijn: Wouters Kluwer. 17. Regulation on the method of setting fines, OG 129/10. 18. Wijckmans F, Visser M, Jaques S, Noël E. (2016). The EU Private Damages Directive Practical Insights, Minutes of the Closed Workshop 2015. Cambridge - Antwerp - Portland: Intersentia.

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ENTREPRENEURIAL ENVIRONMENTS IN INSTITUTIONAL TRANSITIONS Arilova A. Randrianasolo John Carroll University, USA [email protected] Jenny Rakotoarisoa Fakotôry, Madagascar [email protected] ABSTRACT International business, development economics, and strategic management research suggests that as economies transition from relationship-based markets to rule-based markets, entrepreneurs must adjust from network-based strategies to market-based strategies. In other words, as economic development increases, formal institutions become more prevalent than informal institutions. Utilizing this theoretical base, within this current paper, we suggest that the entrepreneurial environments within transition emerging economies foster entrepreneurial activity better than the environments of purely network-based economies with prevalent informal institutions and purely rule-based economies with strong formal institutions. Utilizing data from the Global Entrepreneurship and Development Institute, we utilize a quadratic curve estimation and a multiple regression analysis to provide empirical support for the premise that entrepreneurial environments are optimal in transition economies. Keywords: Emerging Economies, Entrepreneurial Environments, Institutional Theory, Institutional Transitions 1. INTRODUCTION A perspective of economic thought argues that entrepreneurship leads to innovation, increased productivity, and overall economic development (Holcombe, 1998; Hoselitz, 1952). This thought dates back to the mid-20th century when entrepreneurship clearly drove investment, innovation, and structural changes in countries (Leff, 1979). Entrepreneurship in this light was found to be the driver of job creation and development. As key a driver of economic growth as well as job and wealth creation, entrepreneurial activity is crucial to economies seeking to advance and develop, therefore understanding the environments in which entrepreneurs can thrive is important for economic growth (Malewicki, 2005). Within this current paper, we seek to bring a better understanding of such environments by applying the theoretical base of institutional transitions to the question of which institutional environments entrepreneurs thrive best in. Institutional theorists have long stated that the institutional environment within a country or market dictates the “rules of the game” in which organizations and entrepreneurs must operate (Mair and Marti, 2006). This view stems from sociological research which states that people and organizations exist in societal spheres of institutions that dictate behavior on what is acceptable and not acceptable within the institutional environment, otherwise referred to as the rules of the game (Scott, 1987). These rules of the game are found in both formal or regulatory-based institutions as well as more normative informal institutions (Webb, Tihanyi, Ireland, and Sirmon 2009). Formal institutions are formal rules such as intellectual property protection laws in an environment, while informal institutions are norms that exist outside of structured or officially sanctioned channels (Helmke and Levitsky, 2004). Institutional economics research finds that as economies develop and grow, informal institutions become less prevalent and are replaced by more regulatory formal institutions in the market (Peng, 2003). Therefore, as economies develop, they experience institutional transitions. 8


Institutional transitions are “fundamental and comprehensive changes introduced to the formal and informal rules of the game that affect organizations as players” (Peng, 2003, p. 275). We propose that as these transitions happen, the entrepreneurial institutional environment changes, which affect entrepreneurial activity, and therefore affects economic growth. Therefore, we seek to answer the following research question: how do institutional transitions influence the entrepreneurial institutional environment? To answer this question, the following sections review the literature on institutional transitions, adopt a theoretical stance, empirically test this stance, and discuss the implications of the results. 2. INSTITUTIONAL TRANSITIONS In his impactful work, Peng (2003) proposes that as economies develop, the institutional environments of these developing economies transition from network or relationship-based environments to more formal and regulative rule-based environments. Network-based environments rely on informal institutional structures and relationships for transactions, but rule-based environments rely on formal structures for transactions (Peng, 2003). Also, Peng (2003) found that there are different costs and benefits that occur during different points of institutional transitions. When economies are at a purely network-based structure, the costs that firms face to survive are in building relationships; yet when economies are at a purely rulebased structure, the costs are in attaining and maintaining formal agreements within the market (Peng 2003). Organizations in network-based structures enjoy the benefits of informal relationships, and organizations in rule-based economies enjoy the benefits of formal structures. This theoretical base has been utilized to investigate international business topics such as business network structures (Ren, Au, and Birtch, 2009), CEO dualities (Peng, Zhang, and Li, 2007), corporate boards (Peng, 2004), firm diversification strategies (Lee, Peng, and Lee, 2008), network strategies (Peng and Zhou, 2005), and organizational relational exchanges (Zhou and Peng, 2010). Within this current paper, we examine entrepreneurial environments in institutional transitions. Employing institutional theory, we take on the perspective that the institutional environment influences the entrepreneurial activity within an area. This perspective has been supported heavily throughout the entrepreneurship literature (e.g. Levie, Autio, Acs, and Hart, 2014; Minniti, 2004). From this perspective, it can be stated that as economies experience institutional transitions, the change in the institutional environment affects the entrepreneurial activities within the transitioning economies. However, the question remains: which point of an institutional transition fosters the best environment for entrepreneurs? The following section adopts a theoretical stance to answer this question. 3. ENTREPRENEURIAL ENVIRONMENTS AND INSTITUTIONAL TRANSITIONS As previously mentioned, the institutional environment is crucial to entrepreneurial activity, and network-based economies have drastically different institutional environments from rulebased economies (Minniti, 2004; Peng, 2003). Within network-based environments, entrepreneurs and organizations operate primarily on network and relationship-based transactions. As economies develop economically and experience the institutional transition to rule-based environments, network and relationship-based transactions become less prevalent and formal transactions become more common as firms compete with resources and capabilities (Lee et al. 2008). However, both types of environments hold important elements which contribute to entrepreneurial activity. In other words, there are elements within both types of institutional environments that contribute to positive entrepreneurial activity. First, in networkbased environments, the institutional environment values informal institutions and relationshipbased transactions. In fact, Peng (2003) proposes that during the early phases of institutional transitions when economies are the least developed economically, entrepreneurial start-ups and incumbent firms are likely to compete primarily on the basis of networks and relationships 9


along with their resources and capabilities. This is important for entrepreneurial activity because the existence of entrepreneurial networks drives entrepreneurial activity in a region (Malewicki ,2005). These networks allow entrepreneurs to efficiently expand the scope of their information gathering efforts (Thorelli, 1986). Furthermore, networks have been found to aid entrepreneurs in research acquisition (Acs and Gifford 1996; Aldrich and Zimmer, 1986; Larson, 1992). Finally, networks have also been found to be a source of innovation and facilitates opportunity recognition (Malewicki, 2005). Therefore, it can be stated that networkbased institutional environments hold some value to entrepreneurial activity since relationshipbased business networks foster entrepreneurial innovation, facilitates opportunities, and aid in research acquisition. The main premise here is that entrepreneurs benefit from networks within the environment, and this is therefore a benefit of entrepreneurial activity in network-based institutional environments. Second, in rule-based environments, the institutional environment includes strong formal institutions and rule-based transactions. Many researchers have found that entrepreneurship is actually a key strategic tool to enhance economic development within countries (Toma, Grigore, and Marinescu, 2014). However, within this paper, we also argue that there are elements of the rule-based institutional environment that positively influence entrepreneurial activity. Specifically, we propose that the presence of formal institutions decrease uncertainty for entrepreneurs. One of the major impediments for incumbent firms and entrepreneurs is handling uncertainty (Petrakis and Konstantakopoulou, 2015). Uncertainty impedes entrepreneurial activity, and formal institutions minimize uncertainty. For example, research finds that intellectual property protection is stronger in more developed economies where formal institutions are more prevalent (Gould and Grouben, 1996). Thus, entrepreneurs can enjoy less uncertainty in these markets since their patents, copyrights, and trademarks will be better protected in these institutional environments. With this stated, since formal institutions are more prevalent in rule-based institutional environments, we propose that this is a strength within these environments which fosters positive entrepreneurial activity. Rule-based institutional environments therefore provide certainty for entrepreneurs that network-based environments do not. Although we have highlighted benefits for entrepreneurial activity in both network-based and rule-based environments, it is important to state that entrepreneurial activity is not optimal in neither type of environments. First, although the institutional environment in purely network-based economies provides important relationship-based networks, the deficiencies of the formal environment impede opportunities and provides uncertainty for entrepreneurs. For example, a lack of formal institutions may provide a threat to intellectual property infringement and create uncertainty for incumbent firms and entrepreneurs. In other words, in underdeveloped countries, entrepreneurship cannot thrive because of obstructed and incomplete economic systems and deficiencies of organized structures (Leff, 1979). Similarly, we also propose that in purely rule-based environments, the environment is not optimal for entrepreneurial activity. As previously mentioned, networks are important to entrepreneurial activity because they provide entrepreneurs with opportunities to gather information, research acquisition, and the facilitation of innovation (Aldrich and Zimmer, 1986; Larson, 1992; Malewicki, 2005; Thorelli, 1986). In other words, although business networks may exist in rule-based environments, transactions are handled with marketbased rules, which may not foster the innovative environment that entrepreneurs may thrive off of. Thus, since neither rule-based nor network-based institutional environments are optimal for entrepreneurial activity, we propose that transition economies offer the optimal environments for entrepreneurs and incumbent firms. Peng (2003) proposes the dynamics of transition economies in terms of the institutional environments. This idea stems from understanding emerging economies, or low-income economies that are experiencing rapid growth due to economic liberalization (Hoskisson, Eden, Lau, and Wright, 2000). Transition economies are a subset of emerging economies which are transitioning from network-based economies to rule10


based economies, and are experiencing institutional transitions (Peng, 2003). We propose that entrepreneurial activity is optimal in these economies because they offer both the relationship network-based benefits, as well as some benefits of formal or rule-based economies. In other words, we propose that since transition economies hold elements of both network-based institutional environments and market-based environments, these economies foster the best institutional environments for entrepreneurs. Therefore, we formally propose that there is a curvilinear relationship between economic development and optimal entrepreneurial environments. The logic here is that at the extreme ends of economic development, entrepreneurs may not thrive well, however, in transition economies, the environments may hold elements which optimally foster entrepreneurial activity. 4. METHODS 4.1. Measures for variables In order to empirically test the curvilinear relationship between economic development and optimal entrepreneurial environments, data was collected at the country level of analysis. Data was collected for a dependent variable, an independent variable, and several control variables. The dependent variable is optimal entrepreneurial environments. To measure this variable, we collected data from the Global Entrepreneurship and Development Institute (GEDI). GEDI publishes annual data on countries with the best entrepreneurial environments, or entrepreneurship “ecosystems” by assigning each country as score for each country. This score is based on a mix of attitudes, resources, and infrastructure within the country, which contributes the entrepreneurship “ecosystem”. The GEDI uses a methodology that incorporates entrepreneurial attitudes, along with social and economic infrastructures to measure the health of the entrepreneurship ecosystem (GEDI, 2017). Since this data measures both informal institutions such as social attitudes as well as more formal institutions such as economic infrastructures, this data would be appropriate to represent the dependent variable. Data from GEDI’s 2014 report was utilized for this study to measure the dependent variable. The independent variable is economic development, which was measured with GDP per capita from the CIA world Factbook (CIA, 2014). GDP per capita for 2014 was utilized since the GEDI score for 2014 was collected. Along with the dependent and independent variables, several control variables were also measured and collected. First, scholars have found that the cultural environment may also influence the entrepreneurial activity within a country (e.g. Hayton, George, and Zahra, 2002). Therefore, we collected data on the cultures of each country in the dataset. Specifically, we utilized Hofstede’s cultural dimensions (Individualism, Masculinity, Power Distance, and Uncertainty Avoidance) to measure the cultural environment of each country. Finally, we included the World Bank’s “Ease of Doing Business” score for each country as another control variable because some countries may have better entrepreneurial environments than others based on the ease of doing business. The 2014 GEDI reported scores for 121 countries. However, not all of these countries had statistics for Hofstede’s dimensions. Since culture should be included as a control variable, the countries without the scores for Hofstede’s dimensions were deleted from the dataset. This left the data with 87 usable observations. Within this dataset, GDP per capita for the countries ranged from $354.70 to $97,005.50, with a mean of $20,602.45 and a standard deviation of $21,699.25. The GEDI scores ranged from 13.80 to 82.50, with a mean of 42.99 and a standard deviation of 16.83. Therefore this dataset has a mix of economies representing all types of institutional environments.

11


4.2. Analyses and results Before the proposition that there is a curvilinear relationship between economic development and the entrepreneurial environment was tested, the variable correlations were examined for discriminant validity. Table 1 displays the correlations, means, and standard deviations for each construct. Table 1: Construct Correlations, Means, and Standard Deviations 1. GDP Per Capita 2. GEDI Score Control Variables 3. Ease of Doing Business 4. Individualism 5. Masculinity 6. Power Distance 7. Uncertainty Avoidance Mean Standard Deviation *p < .05, **p € 43 million of total assets)

• • • • •

• Croatian Agency for SMEs, Innovations and Investments (HAMAGBICRO)

•

•

•

Center for Monitoring Business Activities in the Energy Sector and Investments CEI

Croatian Chamber of Economy HGK

• • •

• • • • • • •

competent for microentrepreneurs (

3

4,2%

high school

11

15,1%

EQF (level 6, bachelor degree)

21

28,8%

EQF (level 7, master's degree)

41

56,2%

EQF (level 8, Ph.D)

0

0,0%

managerial position

10

13,7%

nonmanagerial position

63

86,3%

Level of education

Position in bank

Total of respondents

73

Table 2.:Structure of respondants (bank employees) Following question (Figure 8.) examines opinion of respondents about the bank’s social responsibility, whether they think the bank in which they work is really socially responsible. There are four possible answers: "Yes", "No"., "I don’t know" and "I'm not sure". 78.1% of respondents consider bank they work for truly socially responsible, 12.3% respondents are not sure, 5.5% don’t know, while 4.1% respondents do not consider the bank they work for socially responsible. Structure of responses of bank employee's about their opinion towards CSR activities of bank they work for

I don't know

4% 12,3%

I'm not sure No

4,1% 78,1%

Yes 0,0%

20,0% 1.: "Do You40,0% 60,0% Question consider bank You for socially responsible"?

80,0%

Figure 8.: Structure of responses of bank employee’s about their opinion towards CSR activities of bank they work for The aim of following question (Figure 9.) is to examine opinions of respondents whether the bank in which they work would be more competitive on the market if they applied more determinants of CSR. Respondents could respond with "Yes" and "No". 91.8% bank employees agreed that the bank would be more competitive if they applied more determinants of CSR concept, and 8.2% of employees said it would not. It can convincingly be concluded that most employees have opinion that bank is more competitive on the market if greater determinants of CSR was used. 357


Structure of employee's answers about applying determinants of CSR activities

8,2%

No

91,8%

Yes 0,0%

20,0%

40,0%

60,0%

80,0%

100,0%

Question 2.:"Do You consider that bank is more competitive on the market field towards other banks if applies greater determinants of CSR activities?"

Figure 9.: Structure of employee’s answers about applying determinants of CSR activities In the following question (Figure 10.), using the scale of claims / opinions from complete agreement to full disagreement with the statement respondants were asked to share their opinion whether can bank attract more clients applying more CSR determinants. 45.2% respondents strongly agreed, 38.4% agreed, strongly disagreed 9.8%, while 6.8% stated “neutral” with the statement. Answer “disagree “ was not chosen by any respondent. According to this results, we can conclude that most bank’s employees strongly agree with the statement that bank can attract more clients if applies more CSR determinants. Structure of employee's answers about atracting larger number of clients using CSR

45,2%

strongly agree 38,4%

agree 6,8%

neutral disagree strongly disagree

0,0% 9,8%

0,0% 10,0% 20,0% 30,0% 40,0% 50,0% Question 3.:"Do You agree that bank You work for can atract more clients if applies more determinants of CSR concept"?

Figure 10.: Structure of employee’s answers about attracting larger number of clients using CSR In the following question (Figure 11.) a scale of claims / opinions from complete agreement to full disagreement with the statement is offered to respondents. The aim was to find out different aspects of respondent’s opinions about effect of CSR on bank’s business and financial performances. 60,3% bank employees think that bank’s CSR activities can affect successful business and enlargement of financial performances, 23,3% bank’s employees consider that can affect in very large extent, 16,4% think that can affect in small extent, while there are no respondents who think that it doesn’t affect at all. It can be assumed that most respondents consider that bank’s CSR activities in considerable extent have impact on successful business and financial performances. 358


Structure of bank employee's responses about affect of CSR on business

It does not affect at all

In small extent

0,0%

16,4%

60,3%

In considerable extent 23,3%

In very large extent

0,0% 10,0% 20,0% 30,0% 40,0% 50,0% 60,0% 70,0% Question 4.:"In which extent CSR activities of bank affect on successful business and on enlargement of financial performances?"

Figure 11.: Structure of bank employee’s responses about affect of CSR on business and financial performances 5. CONCLUSION The aim of this research is to point out the need for greater engagement of commercial banks in the area of social responsibility that requires more investment and work for public awareness in that domain. Banks have to take responsibility for the consequences they cause by its actions and anticipate in future challenges. According to most clients, bank’s CSR activities are still considered as inconclusive and distrustful. There is significant percentage of respondents claiming that social responsibility of banks is important to them. That should encourage banks for greater engagement in that field so applying this concept with more effort can ultimately turn into a long-term business practice that has great potential to result in building more positive reputation in the public eye. Bank employees fully agreed with the statement that the bank in which they work can attract more clients if it is socially responsible. This data is indicative because it points bank employee’s high degree of positive thinking about CSR and the knowledge of how CSR can affect or may be related to consumer behavior. In all business activities, especially in the banking sector, it is necessary to be proactive and innovative, to behave outside the framework and to be in line with social trends. Modern society demands new social paradigms in terms of social responsibility that banks should respond to in order to remain competitive, maintain their corporate image and enjoy consumer loyalty. LITERATURE: 1. Achua, J. K. (2012). Corporate social responsibility in Nigerian Banking system. Society and Business Review, 3(1), 57-71. 2. Bagić, A., Škrabalo, M., Narančić, L. (2006): An overview of corporate social responsibility in Croatia, Zagreb : AED i. e. Academy for Educational Development 3. Bahtijarević Šiber,F., Sikavica,P.,Pološki Vokić, N. (2008): Suvremeni menadžment; vještine, sustavi i izazovi, ŠK, Zagreb 2008. 4. Darling, A. (1997) : A Political Perspective, Stakeholder Capitalism, Macmillan, London 5. Dorasamy, N. (2013) Corporate Social Responsibility and Ethical Banking for Developing Economies Journal of Economics and Behavioral Studies Vol. 5, No. 11, 777-785

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6. Hassan, A. & Latiff, H. S. B. A. (2009) Corporate Social Responsibility of Islamic Financial Institutions and Businesses: Optimizing Charity Value, Humanomics, Vol. 25, No. 3, 177188 7. Heal, G. (2005): Corporate Social Responsibility: An Economic and financial framework, The Geneva Papers, 2005, 30, (387–409) The International Association for the Study of Insurance Economics 1018-5895/05 8. Khan H., Halabi A., Samy M., (2009) Corporate social responsibility (CSR) reporting: a study of selected banking companies in Bangladesh, Social Responsibility Journal, Vol. 5 Issue: 3, 344-357 9. Madrakhimova, F.S. (2015) Corporate Social Responsibility in European Banks, Journal of Finance, Accounting and Management, 6(1), 23-29 10. Pomering, A & Dolnicar, S. (2006) Customers sensitivity to different measures of corporate socialresponsibility in the Australian banking sector, ANZMAC CD Proceedings (Australia and New Zealand Marketing Academy Conference), Brisbane, Queensland, 4-6 11. Purnamasari,V., Dwi Hastuti T., Chrismastuti, A. (2015) : CSR: The Impact on Long-Term and ShortTerm Company Performance, International Journal of Humanities and Management Sciences (IJHMS) Volume 3, Issue 4 (2015) 248-252 12. Remišová, A.; Búciová, Z. (2012) Measuring corporate social responsibility towards employees, Journal for East European Management Studies, Hampp, Mering, Vol. 17, Iss. 3, 273-291 13. Scholtens, B. (2008) Corporate social responsibility in the international banking industry. Journal of Business Ethics, 86, 159-175 14. Scholtens, B. (2007) Financial and Social Performance of Socially Responsible Investments in the Netherlands. Corporate Governance: An International Review, 15: 1090–1105. 15. Sankar.S., Bhattacharya,C.B.(2001) Does Doing Good Always Lead to Doing Better? Consumer Reactions to Corporate Social Responsibility, Journal of Marketing Research, Vol. 38, No. 2, 225-243 16. Sisek, B., Strahonja, M. (2012): Stakeholderski pristup poduzeću, Poslovna izvrsnost Zagreb, god. 4 (2012), 129-146

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CORPORATE INCOME TAX REVENUE DETERMINANTS: HOW IMPORTANT IS THE TAX RATE? Andrzej Karpowicz Bialystok University of Technology, Management Faculty, Financial and Accounting Department, Poland [email protected] Elzbieta Majewska University of Bialystok, Faculty of Mathematics and Informatics, Department of Applied Mathematics, Poland [email protected] ABSTRACT Tax evasion and tax avoidance gains attention. States with globalized economies face erosion of the tax base. As a result sources for public goods may become less available in particular jurisdictions. To cope with the challenge international and national initiatives arise. They include several actions that could be gathered under the name of BEPS (“Base Erosion Profit Shifting”). Corporate Income Tax (“CIT”) are among taxes particularly prone to profit shifting. To assure (even limited) budget inflows from that tax states seek to maintain attractiveness of their CIT systems. Commonly used tool is decrease of the statutory CIT rates. Such actions could lead, however, to infinite CIT rate competition between various jurisdictions. Eventually, an undesirable effect could be achieved consisting in minimal CIT budget revenues of each engaged state. In this article we identify key factors influencing receipts from CIT. The determinants are divided into two groups – i.e. (I) statutory CIT rate and (II) other factors that exert impact on revenues from CIT that are beyond CIT law. This latter group includes (i) GDP growth, (ii) size of the shadow economy, (iii) globalization index and (iv) top statutory personal income tax rate. The determinants are analyzed using panel regression of particular dependent variables for the years 1995 – 2014 for all EU Member States. Quantitative analysis leads to an important conclusion that the level of CIT rate exert lesser impact on CIT revenues than all other relevant determinants collectively. Moreover, impact of shadow economy on CIT revenues proved to be insignificant. This findings are interesting both from scientific and practical perspective as may influence attitude of states towards optimal CIT rate level. Keywords: Corporate Income Tax, Fiscal Policy, Macroeconomic Policy, Tax 1. INTRODUCTION Statutory corporate income tax rates have been lowered (or at least remained unchanged) in all EU Member States over the last two decades with no exceptions. Corporate income tax (“CIT”) is not harmonized on the EU level and each Member State runs fiscal policy in this respect independently (with some limitations that do not refer to statutory tax rate). The graph below shows development of top average statutory CIT rate in current EU-28 states (calculated as a sum of top statutory CIT rates in each Member State divided by number of Member States).

Figure following on the next page

361


Figure 1. Average top statutory CIT rates in EU28 Member States; Compiled based on Taxation Trends in the European Union 2017 (EU, Taxation Trends in the European Union, 2017) and Taxation Trends in the European Union 2013 (EU, Taxation Trends in the European Union, 2013) 36 34 PERCENT (%)

32 30 28 26 24 22 20

YEAR

In 1995 such artificial average top statutory CIT rate was 34.8 percent. In 2017 it decreased by 12.6 percentage points to 22.2 percent. This is the lowest level recorded in that analyzed period. Such “race to the bottom” rises anxiety among policymakers that CIT competition may eventually deprive local state budgets of revenues from that tax. To face that challenges targeted initiatives are taken. Under BEPS (“Base Erosion Profit Shifting”) initiative Organisation for Economic Co-operation and Development suggested several solutions that should preserve the tax base in the country, where income in economic sense arises. Most proposals refer to CIT. Among them are mentioned Controlled foreign company (“CFC”) regulations, thin capitalization restrictions, need for Double tax treaties renegotiation to limit their abuse and to close the loopholes, necessity for transfer pricing regulations update, catching income of companies rising revenues globally based on IT services, IP rights charges alterations, elimination of hybrid instruments, introduction of multinational tax agreements etc.. OECD is not a legislative body. Therefore, the reports produced by this organization may be used onl y as a hint for governments. European Commission is also aware of the so called “harmful tax competition”. A solution is seen in harmonization of CIT among Member States. The first step would be establishment of equal tax base. Thus, Common Consolidated Corporate Tax Base for the Member States (“CCCTB”) is proposed. CCCTB seems at present to be the final product of decades spent on discussions on CIT harmonization, which started in 1962 with Neumark Report. CCCTB assumes that the income of a company would be calculated on the EU-wide basis across all Member States. In other words a company acting on EU market could offset profits generated in one Member State against losses incurred in another Member State. However, income calculated in this way will not be directly allocated to particular Member States. The taxing right of total EU wide profit of a company would be assigned to different Member States using simple measures such as sales, labor and assets. These three factors would be equally weighted. CCCTB has not been introduced yet and discussions on its final shape are still on-going. Thus, both BEPS initiative supported by OECD as well as CCCTB proposal of EU Commission focus on CIT revenues and concurrently stress the economic origin of income rather than the legal sense. The aim is to tax income in jurisdiction where it arises taking into account factual business activity rather than to tax profits in jurisdiction where they are artificially transferred using tax avoidance tools. 362


Neither BEPS proposals in full scope nor CCCTB have been introduced in Member States yet. Therefore, there is no instrument available so far that could keep the states off from CIT rate competition. As a result the following research question arises: how important impact statutory CIT rates exercise on the level of budget revenues from that tax (and if any)? In this article we compare from this perspective (i) the significance of statutory CIT rates with (ii) other factors influencing receipts from CIT that are beyond CIT law. 2. LITERATURE REVIEW The importance of statutory CIT tax rate from the perspective of its impact on budget revenues from that tax has not been reviewed so far in depth. Available research on CIT revenue determinants focused either on: (i) a single state, (ii) one factor influencing receipts from CIT or (iii) a group of countries, where one or more CIT revenue determinants were analyzed. Auerbach and Poterba were one of the first researchers who made a contribution in respect of CIT revenue determinants (Auerbach & Poterba, Why have corporate tax revenues declined?, 1987). They analyzed the data for one state only i.e. for US market. They found that the corporate profitability is the most important determinant of CIT receipts. Poterba in his research came to similar conclusions. He claimed that indeed the corporate profitability plays a crucial role in shaping government income from corporate taxation in the US (Poterba, 1991). The studies for the US market were repeated by Auerbach for the new time series data (Auerbach, Why Have Corporate Tax Revenues Declined? Another Look, 2006). He argued that legal restrictions in the offset of tax losses explain significantly rising CIT revenues. Douglas analyzed the reasons for declining importance of CIT receipts in Canadian budget in the period 1960 – 1985 (Douglas, 1990). He found that the falling profitability of companies was the most important reason for decline of CIT receipts. Devereux et al. focused also on one country data as well – i.e. United Kingdom (Devereux, Griffith, & Klemm, Why has the UK corporation tax raised so much revenue?, 2004). They claimed that among the most important determinants of CIT receipts, which supported the substantial revenues from that tax in the UK were (i) legal tax base broadening, (ii) increase in the size of corporate sector and (iii) high profits earned by financial institutions. Similar studies were performed by Becker and Fuest for Germany (Becker & Fuest, Internationalization and business tax revenue—evidence from Germany, 2010). They found that the degree of internationalization has a positive impact on CIT receipts. There was no research performed, where key objective of analysis would be the impact of statutory CIT rate on budget revenues from this tax. Gropp and Kostial focused rather on one particular CIT revenue determinant rather than on a single country (Gropp & Kostial, 2000). They used data for 19 OECD states for the period 1988 – 1997 and asked whether outflows and inflows of foreign direct investment (“FDI”) exert an impact on CIT receipts. In the analysis they argued that indeed in (out) flows of FDI has a positive (negative) impact on CIT revenues. Slemrod focused on the relations between measures of openness of the economy and CIT rates as well as CIT revenues (Slemrod, Are corporate tax rates, or countries, converging?, 2004). In his estimation he employed data for several countries and analyzed them in five year periods from 1975 to 1995. More recently Riedl and Rocha-Akis worked on data for 17 OECD countries for the period 1982 – 2005 and sought to measure the relation between the CIT rates and CIT revenues (Riedl & Rocha-Akis, 2012). They found that CIT revenues of one state significantly depend on the CIT rates level both in-house and in the neighboring countries. Thus, this seems to be one of a few studies, which considered the impact of CIT rates on CIT receipts. Finally, there is a contribution to the literature of CIT revenue determinants, where both a group of countries and several factors, which influence the government receipts from that tax were analyzed. Research performed by Clausing covered different geographical regions i.e. OECD countries and years 1979 – 2002 (Clausing K. , 2007). For quantitative analysis as independent variables she used statutory CIT rate, corporate profitability and size of the corporate sector. 363


However, she did not take into account some CIT revenue determinants, which seem important (such as size of the shadow economy, breadth of legal the tax base, capital mobility or taxation level of individual income). Devereux focused on 20 OECD countries for the period 1965 – 2004 (Devereux, Developments in the taxation of corporate profit in the OECD since 1965: Rates, bases and revenues, 2007). He considered corporate taxation rates, profit shifting and depreciation allowances. The latest research encompassing several countries was performed by Kubatova and Rihova (Kubatova & Rihova, 2008). For their calculations they worked on OECD data for 1980 – 2006. As independent variables they used tax rate, profit potential, tax evasion, corporate sector size and cyclicality of the economy. However, it seems that the proxies for particular explanatory variables were not chosen with enough attention or the independent variables themselves in some cases could have been not accurate or sometimes they were missing. This is a general remark to most research in this topic made so far. It should be admitted that in several cases the lack of good proxies results from their unavailability. Summarizing, there is a research gap with respect to assessment of CIT revenue determinants in the EU. Firstly there was no research undertaken for this set of countries (i.e. for EU-28). Secondly, the available studies that were made for other regions often lack for comprehensive analysis of factors (including CIT rate), which should determine the government revenues from CIT. Thirdly, there is no available analysis for the new time series data. Therefore, especially in the view of general convergence of EU market, single monetary policy in Euro zone (but concurrently lack of common fiscal policy), high public deficits of Member States and advancing CIT competition, the research with respect to impact of statutory CIT rate on budget revenues from that tax raised by the Member States is fundamental. 3. VARIABLES AND SOURCES OF DATA Variables were collected for all Member States for the period 1995-2014 (complete data is not available for more recent years). The objective of the research is to assess the impact of statutory CIT rate on budget revenues from that tax. Therefore, a dependent variable should include some measure of corporate tax revenues. Thus, the dependent variable in the estimation is: Y=

Corporate Tax Revenue GDP

Such variable shows the importance of CIT revenues in particular Member States in consecutive years. Concurrently, the size of economies of EU countries is taken into consideration. This assures the comparability of the data between countries. The data provided by the Eurostat are used (according to the Eurostat classification code D51B; Label: Taxes on the income or profits of corporations). The figures available at Eurostat database are expressed as a share of GDP of respective countries. Therefore, no additional calculations are required. The figures are complete for all states and years for the whole analyzed period except for Croatia for years 1995-2001 where imputation was needed. The focus of these research is laid on statutory CIT rate in particular. Member States impose either single CIT rate (if linear taxation is selected) or foresee more than one CIT rate for different levels of income of taxpayers (progressive taxation). For our analysis we use either (i) top statutory CIT rate imposed by particular state in case progressive taxation is selected by that state or (ii) the only existing statutory CIT rate if the state maintains linear CIT taxation (without application of income brackets). Use of the top CIT rate seems more appropriate than some calculated average CIT rate. The reason is that statutory CIT rate as such is given by law and our objective is to measure the impact of the legally set rate on revenues from that tax rather than some artificially computed medium rate. Application of top CIT rates is also reasonable if the top personal income tax (“PIT”) rates are to be applied to the estimation (discussed below). 364


The data were sourced from Taxation trends in the European Union 2011 edition (EU, Taxation trends in the European Union, 2011) and Taxation trends in the European Union 2017 edition (EU, Taxation Trends in the European Union, 2017) (both documents published by European Commission). Importance of statutory CIT rate is compared inter alia with statutory PIT rate. Most EU states maintain progressive labor tax rates. This means that particular PIT rates are foreseen for separate income brackets. In the model only one level of PIT rate may be used for a certain state for a period. Thus, the top PIT rates are chosen and applied. This is also connected with the fact that PIT serves as a CIT backstop, whereas those are primarily the top PIT rates, which are taken into account by most firms deciding on their legal form (and hence taxation – whether subject to PIT or CIT) and therefore those top PIT rates play a key role in erosion of PIT revenues. Moreover, as top CIT rates are also to be used, application of top PIT rates assures consistent approach in the considered calculations. The data for statutory PIT rates are collected from European Commission publications i.e. Taxation trends in the European Union 2011 edition (EU, Taxation trends in the European Union, 2011) and Taxation trends in the European Union 2017 edition (EU, Taxation Trends in the European Union, 2017). One of the determinants analyzed in this research is profitability of the companies. There is no aggregated data in this respect. However, profitability of the corporate sector positively correlates with GDP. Hence, if GDP per capita increases, so should also the profitability of the corporate sector. Such linkage is commonly used in the literature and is appropriate. The data for statutory GDP growth is taken from Eurostat for the years 1995-2013 (code PCH_PRE; Label: Percentage change on previous period) (almost no imputation was needed – only for some earlier years for some states) and from OECD for the year 2014 (as no complete data was available from Eurostat for this year). The next issue is the intensity of tax evasion and tax avoidance practices and the size of shadow economy. There are no official data on these matters. The scale of tax avoidance or tax evasion is unobservable. Difficulty in estimation of its scope stems from the fact that these practices are either illegal or at least partly illegal in some states and hence not recorded. Shadow economy is hidden and economic agents evading taxes have no interest to admit not paying them. Therefore, no exact figures can be provided also in this respect. There are estimated numbers made on yearly basis for the size of the shadow economy. The most complete figures are provided by Friedrich Schneider and Leandro Medina in “Shadow Economies around the World: New Results for 158 Countries over 1991-2015” (Schneider & Medina, 2017), which are used in this model for the years 1995-2014. Globalization, which is the following determinant of CIT revenues, cannot be directly measured. It is closely connected with increasing integration of world economy. Globalization index published by ETH Zurich seems a good proxy (Dreher, 2006). The data on Globalization index are available for all EU states for the whole period that we analyze, which is 1995 – 2014. On the below graph is presented frequency distribution of dependent and explanatory variables for particular states over the verified period of 1995-2014.

Figure following on the next page

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Figure 2. Frequency distribution of variables

Based on the above it seems that variability of particular regressors to be used in the model is reasonable. 4. MODEL ESTIMATION Taking into consideration the source data and their composition the most suitable estimation method seems panel data regression. Therefore, the following model is used: Yit = α + β1 CIT Rateit + β2 GDP growthit + β3 Shadow Economyit + β4 Globalizationit + β5 PIT Rate it + εit Corporate Tax Revenue

In the model Yit is , which we already discussed in the previous subsection. GDP The indexes i and t denote data for particular Member States in certain years, respectively. α is the intercept. The explanatory variables were defined in the preceding chapter. Finally, ε is a random variable assigned to particular EU state.

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To assure the figures from econometric point of view should be regarded as panel data we conducted some initial calculations. In the first step the model is estimated with pooled ordinary least squares method (polled OLS). Breusch-Pagan test (𝑝 = 0) suggests that this is not appropriate model and model with individual-specific effects is more effective. From the Hausman test (𝑝 > 0.05) results that random effects model is suitable. All independent variables except for shadow economy are statistically significant. After shadow economy is eliminated from regressors the estimation of random effects model is as follows: Figure 3. Panel regression model with random effects Random-effects (GLS), using 560 observations Included 28 cross-sectional units Time-series length = 20 Dependent variable: CITrevenuespercentageofGDP

const GDPgrowth Globalizationindex TopstatutoryCITrate TopstatutoryPITrate Mean dependent var Sum squared resid Log-likelihood Schwarz criterion

Coefficient −2.60560 0.0290487 0.0425292 0.0440254 0.0168842

Std. Error 0.641195 0.00783157 0.00599067 0.00606190 0.00495517

2.774286 856.6622 −913.6355 1858.911

z −4.064 3.709 7.099 7.263 3.407

S.D. dependent var S.E. of regression Akaike criterion Hannan-Quinn

p-value