African Journal of Business Management Vol.5 (7), pp. 2654-2659, 4 April 2011 Available online at http://www.academicjournals.org/AJBM DOI: 10.5897/AJBM10.895 ISSN 1993-8233 ©2011 Academic Journals
Full Length Research Paper
SMEs and entrepreneurs investments' profitability effects within the transition period in the Republic of Serbia Mladen Radišić*, Branislav Marić and Dušan Dobromirov 1
Department for Industrial Engineering and Management, Faculty of Technical Sciences, University of Novi Sad, Republic of Serbia. Accepted 11 February, 2011
Small and medium business sector is becoming the main focus of economy development strategy in the Republic of Serbia. Since the transition period lasts for almost two decades, it is of high importance for the society to plan deeply investment capacities. While SMEs and entrepreneurship development process is happening, some industry branches become prioritization for the potential investors. The paper analyses de facto situation the country is facing in the last three years of the transition process, considering both industry branches and expected effects of built capacities. The authors collected a sample of 68 projects and found interesting results which have been presented in this paper. Key words: Investments, profitability effects, industry branches, SMEs, entrepreneurs.
INTRODUCTION For the country as a whole, the investments in industry sector represent development generator of the infrastructure system. Setting, maintenance and development of the industry investments system is the only way out from the crisis. Since the democratic changes the Republic of Serbia faced in 2000, the economic progress of the country which has begun is significantly aided by foreign capital and financial funds. Dobromirov et al. (2010) stated in their study that, since the beginning of the transition period, emerging markets in Europe have become increasingly attractive to international and domestic investors. As a result of these actions, many industry branches are arising and building-up, gross domestic product is increasing, new jobs are created, etc. The aim of this paper is to examine the potential investors’ choice for specific industry branches, as well as profitability effects which are a result of the prepared
business plans. Also, this paper analyses parameters values which describe investments profitability and present needed conclusions. The research is conducted on a sample consisting of 68 investment programs which were realized in the Republic of Serbia over three years period. The sample consists of different randomly chosen investment programs from different industries (SMEs and entrepreneurs). The overview of different industry branches will be presented within the study’s data sample and methodology where the data sample is explained. Key indicators for profitability of every single investment program are reflected in the following parameters:
t p - the investment's payback period, RSo - the relative net present value, ISR - the internal rate of return, which will be presented within theoretical background section.
*Corresponding author. E-mail:
[email protected]. Tel: + 381 21 485 21 91. JEL Classification: G11, G31.
Out of all interesting findings which cover different companies’ activities, the authors present interesting investment decisions in the paper.
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Table 1. The structure of the economic course.
Course structure
Project’s lifetime (years) 0 1 2 3 … n
Inflows Total revenue After depreciation value Outflows Long-term assets Short-term assets Expenses for material Non-material expenses Employees paychecks Corporate profit tax Net inflows
THEORETICAL BACKGROUND
economic course,
Every single company is carrying out many investment projects during its life cycle. As Koop (2005) clearly underlines, a firm’s decision to carry out a new investment will not immediately affect production. That process consists of many important phases, such as: planning, investment program documentation preparation, financing, etc. In their work, Maric et al. (2010) explain the investment program as an expert document and basis for investment decisions, which marks the closing stage of planning as part of the investment management process. The investment studies and business plans creation methodology is based on a dynamic method of investment intention evaluation. Project justification is recognized through the series of different indicators, and the indicators of the project's profitability have a decisive role. The profitability of an investment venture is shown through several dynamic methods and thus, the investment's payback period, the internal rate of return and the net present value are the most common (Heley and Jutkenhorst, 1989). The basis for each of the dynamic methods is the economic course, with the structure presented in Table 1 (Jain et al., 2004).
and
The method of the investment's payback period
Where, So represents the project’s net present value,
The method of the investment's payback period implies the establishment of the time necessary to return the investments. The mathematical expression of the method is as follows: tp
t
TI
e n
n 0
Where,
NPnep n 0
TI ne represents the total investment in the
economic course,
ep n
NP
is the net income
in the
n represents the years in the project's lifetime.
In this method the measure of assessment is the longest acceptable period of payback, that is, the investment's payback period must be shorter than the project's lifetime which is usually defined by the lifetime of equipment built into the project. In their study, Sengar and Kothari (2008) calculate both investment's payback period and internal rate of return for their economic evaluation and, therefore, explain the importance of these two dynamic indicators of investment profitability. The method of the net present value Net present value is the current value of a stream of income discounted by a factor over the period of an investment (Geddes, 2006). The mathematical expression of the method is as follows: t
So n
NPnep p n 0 (1 ) 100
(2)
NPnep is the net income in the economic course, p is the discount factor, and n represents the years in the project's lifetime. Relative net present value has the following mathematical expression:
RSo
(1)
t p is the investment's payback period,
So TI ne
(3)
The method of internal rate of return The project's internal rate of return is defined as the
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discount rate which settles the net present value to zero. It is determined by the following equation:
NPnep
t n 0
1
ISR 100
n
0
(4)
Where, ISR is the internal rate of return. Kleczyk (2008) states that the level of the projects’ internal rates of return for different strategies is one of the most important decision factors when deciding which new products to develop and which new investment program to conduct. International financial corporations advised professional community in formal Yugoslavia to implement above mentioned methods while Joint methodology for socioeconomic investments justification appraisal was ratified in 1987. Since then, all the investment projects had the investment's payback period, the internal rate of return and the net present value as a basis for the project justification. DATA SAMPLE AND METHODOLOGY During the research process, a sample has been collected consisting of 68 SMEs and entrepreneurs investment programs which were realized in the Republic of Serbia over a period of three years. The sample consists of different randomly chosen investment programs from different industries. Legislation in the field of investment in the Republic of Serbia commits to investment planners to calculate the three key factors of profitability, as well as the testing of each project within the sensitive analysis. Risk analysis, which would include the calculation of the projected results achievement probability of the investment program was not described in this paper due to the fact that investment program planners are not obliged to implement it. Therefore, such information that could be used for a detailed risk analysis of each of the investment programs and industry branches, were not available to the authors. Parameters of the investment's payback period, relative net present value and the internal rate of return, as well as industry branch division, are shown in Table 2. A wide range of manufacturing and service areas is presented in different branches of production which contribute to the rapid development of countries in transition that reorganize the structure of ownership along with the adjustment of economic environment.
RESULTS AND DISCUSSION The first important analysis factor of intended investments is projects’ industry branch affiliation. The data presented in the Table 2 can be graphically presented in Figure 1. The data interpreted in the Table 2 and given in Figure 1 show that 29.4% of the new investors decide to invest in agricultural complex (mostly food and beverage producers). Service industry, with 17.6% of the new investors, holds second place and third place is occupied
for the graphical industry with printing and production of cardboard and eco packaging. Further on, the authors found interesting to research the parameters of dynamic indicators of investment profitability. The mean values of tp, RSo and ISR for the sample, divided by industry branches, are presented in the Table 3. By observing the results of the conducted research, which are presented in Table 3, one could say that the highest value of profitability effects of indented investments is expected for the trade sector, then in textile and metal industry. At the same, the lowest values can be found in electrical distribution, service industry and Industry of building materials. The mean values of the given sample, which consists of 68 different projects, show the following: 1. tp = 3.41 years. 2. RSo = 0.935 3. ISR = 28.66%. Earlier researches conducted in the territory of the Republic of Serbia during 1991 and 1995 (Maric, 1997) may be used as a benchmark for profitability effects of present research. Comparative data are presented in Table 4. It is clearly obvious that profitability effects of indented investments almost match in the 19 years long period of time. Slight differences between three dynamic methods of assessment of investment projects originate from input and output price disparities (in economic course the constant output and input prices are built-in during the project's entire lifetime) and the fact that all methods are based on data from the economic course which is (hypothetically) "cleaned" of inflation in every year of the project's lifetime. That is how it is obviously possible to establish a relationship between individual methods of project assessment. Conclusions The transition period is unique for every single emerging country. The Republic of Serbia follows the path of the predecessors – the countries which have already joined the European Union. The data of indented and projected development programs represent interesting research and observation area. Thus, this paper presents a professional presentation of a part of mentioned research area. We can underline the following conclusions, as the most important; 1. The most coveted industry branches where SMEs and entrepreneurs are willing to invest are presented in details. 2. Profitability effects for each of industry branches are shown. 3. Benchmark analysis of investment profitability effects
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Table 2. Parameters and industry branch division of the sample.
Number
Industry branch
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50.
AC AC AC AC AC AC AC AC AC AC AC AC AC AC AC AC AC AC AC AC SI SI SI SI SI SI SI SI SI SI SI SI GI GI GI GI GI GI GI GI TR TR TR TR TR TR TR MI MI MI
Profitability effects tp (years) RSo(-) ISR (%) 2.5 1.59 39.3 3.4 0.367 28.6 3.6 1.25 12.0 1.9 0.53 36.3 4.5 -0.04 6.54 3.5 0.47 17.1 3.6 1.026 27.2 2.1 1.78 39.3 2.8 1.41 34.9 1.8 1.44 48.8 2.8 1.04 36.7 2.1 1.06 33.8 3.5 0.94 30.6 6.0 -0.07 6.4 5.8 0.88 31.8 4.1 1.33 17.5 2.3 1.76 33.6 2.1 1.46 42.0 2.1 1.88 39.5 3.3 0.337 23.3 3.7 1.04 30.5 1.7 1.73 68.5 2.9 0.253 13.6 9.5 -0.235 4.1 3.5 0.856 28.5 2.8 1.68 49.7 4.3 0.413 16.8 4.3 0.27 13.6 4.8 0.23 9.4 2.5 1.05 15.3 6.1 1.18 12.1 2.1 0.77 32.7 6.1 0.347 10.6 2.3 1.085 39.8 3.0 1.48 23.6 1.9 0.62 29.0 3.6 1.87 30.5 3.2 0.83 28.9 1.5 1.085 39.9 4.5 1.45 31.2 6.4 0.101 10.0 1.4 2.218 66.9 1.1 3.31 53.4 1.8 1.3 47.7 2.5 0.83 28.7 2.8 0.44 23.7 7.5 0.095 10.5 3.0 0.07 38.0 3.5 1.61 31.3 2.4 0.61 36.1
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Table 2. Contd.
51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68.
MI MI MI TI TI TI TI TI TI PI PI PI PI PI BM BM TX ED
1.6 7.0 6.8 1.8 2.9 3.1 3.3 3.4 2.5 2.0 3.0 2.2 4.2 4.3 3.2 3.2 4.3 4.3
2.6 0.18 0.01 0.127 0.95 2.26 0.55 0.81 0.806 0.282 1.67 1.46 0.47 0.02 1.3 0.58 0.06 0.51
55.9 12.1 8.53 27.8 26.0 42.6 26.5 26.7 31.5 28.2 22.3 42.0 20.2 29.7 31.0 24.3 34.0 23.3
Industry branches that comprise the sample of the research are: AC - Agricultural complex (food production, manufacture of beverage and production of fodder). SI Service industry (various kinds of services; manicure and pedicure, solarium, taxi vehicles, beauty salon, procurement of equipment for radio and TV stations, computer science courses). GI - Graphic industry (opening printing shop and production of cardboard packaging).TR – Trade (opening a retail outlet). MI - Metal industry (metal processing (production of machine parts, devices and assemblies).TI - timber industry (Manufacture of furniture, primary processing of wood, manufacturing wooden packing). PI - plastic industry (Plastic packaging (different forms and dimensions). BM - building materials (Production of building materials).TX - textile industry (Manufacture of garments and clothing).ED - electrical distribution (Reconstruction of street lighting).
Percentage in the sample 30
29.4 29,4
20
17.6 17,6
AC 10
11.8 11,8
10.3 10,3
8.8 8,8
8.8 8,8
MI
TI
SI GI
TR
7.3 7,3
PI
2.9 2,9
BM
1.5 1,5
1.5 1,5
TX
ED
Industry branch
Figure 1. The graphical presentation of industry branches.
for the 19 years long period of time is presented. In our further research, we would
like to further
investigate mutual comparison between the dynamic indicators of investment profitability for other transitional and developed countries.
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Table 3. The mean values of tp, RSo and ISR.
Number 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
Industry branch AC SI GI TR MI TI PI BM TX ED The whole sample
Profitability effects tp (years) RSo (-) 3.19 1.002 4.02 0.769 3.26 1.095 3.36 1.184 4.05 0.846 2.83 0.917 3.24 0.780 3.20 0.940 4.30 0.06 4.30 0.51 3.41 0.935
ISR (%) 28.10 24.57 29.18 34.41 30.32 30.18 28.48 27.65 34.0 23.3 28.66
Table 4. Comparative data for 1991, 1995 and 2010.
Year Sample size tp (years) RSo ISR (%)
1991 51 4.78 0.722 27.05
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1995 56 5.22 0.916 25.81
2010 68 3.41 0.935 28.66
Maric B, Dobromirov D, Radisic M (2010). Researching the dependence between the dynamic indicators of investment profitability. Afr. J. Bus. Manag., forthcoming. Maric B (1997). Investment rentability effects and analysis of existing situation and its relation. Finan. mag., 5: 407-413. Sengar S, Kothari S (2008). Economic evaluation of greenhouse for cultivation of rose nursery. Afr. J. Agric. Res., 3(6): 435-439.
